Expansion of central clearing

By the end of 2012, all standardised over-the-counter (OTC) derivatives will have to be cleared through central counterparties (CCPs). We estimate the financial resources that different CCPs would need to clear safely the full volume of interest rate swaps and credit default swaps currently held by major derivatives dealers. Our results suggest that these dealers already have sufficient unencumbered assets to meet initial margin requirements, but that a few may need to increase their cash holdings to meet variation margin calls in a timely way. We also find that the potential costs of individual or multiple dealer defaults for CCPs and their non-defaulting clearing members are likely to be small relative to their equity as long as CCPs factor into initial margin requirements the extent of tail risk and time variation in risk of different types of derivatives. Finally, clearing different types of OTC derivatives in a single CCP could reduce both margins and collective loss-absorbing resources.

JEL classification:  G24, G28