A run on a bank occurs when depositors withdraw deposits quickly. In the days before deposit insurance, bank runs from retail depositors were common as their money was genuinely at risk from bank failure. These runs were damaging as banks which were solvent but not sufficiently liquid (due to demand deposits funding term loans) could fail due to a run. These days, bank runs occur in the wholesale funding market: hence Gorton and Metrick’s influential paper about the run on repo in the 2008 crisis. These repo runs occur if wholesale funders refuse to carry on providing liquidity. Continue reading “Bank run Vs CCP run”
A few good articles are up on the topics of collateral and clearing:
This article on Bloomberg highlights the fact that banks will be prepared to use the cheapest collateral possible, regardless of quality. That could of course have quite an impact on the objective of “systemic risk reduction”.
Similarly this article in IFR looks at the looming rules on Initial Margin on uncleared trades. If widely applied, it could discourage hedging by end users, thus also negating the desired system risk reduction of the rules. Continue reading “Collateral and Clearing”
“Regulation as such would not be a problem, if only one knew how it looks like“. This is a claim often heard by asset managers.
There has been published a lot of literature, news and considerations around EMIR in the past months. EMIR applies its obligations to “financial institutions”, including investment firms, Undertakings for Collective Investments in Transferable Securities (“UCITS”) funds and their managers, and entities that will be authorized under the Alternative Investment Funds Managers Directive (“AIFMD”), who trade in “eligible derivatives contracts” such as options, futures, swaps, and contracts for differences. Continue reading “Asset Manager Challenges under EMIR”
Well some of the Big banks granted two-year phase in to meet Dodd-Frank rule to wall off swaps, as the phase 2 commenced from June 10th 2013.
The shift towards OTC clearing is a huge collective undertaking for clearing houses, clearing firms and buy-side clients. The use of a CCP is a mutualised risk model that shifts the market away from what were exclusively bilateral arrangements – under master agreement and credit support annex (CSA) – to one where both the FCM (as a clearing house member) and the client will be required to post margin into the CCP. It is a radical departure. Many are still coming to terms with the concept that all derivative contracts like IRS and CDS (and not only interdealer ones) will now have to be cleared with initial margins and variation margins based on the mark-to-market’s daily fluctuations, just like exchange-traded derivatives. Continue reading “Collateral Management will take Paradigm shift under Dodd Frank & EMIR”
“Regulators want capital and margin rules to encourage central clearing, but analysis suggests costs may currently be higher in the cleared world”
So what does he mean let’s try to look at the existing capital and margin rules may not encourage market participants to centrally clear their over-the-counter derivatives trades. The capital regime for both cleared and uncleared trades is still unsettled, as is the margin regime for transactions that remain bilateral, but regulators are keen to ensure the framework pushes trades towards central counterparties (CCPs). As things stand,costs may be higher in the cleared world, particularly for market participants that have a directional book of trades. Continue reading “Central Counterparties Banks argues Clearing incentives – are not there :”