The Securities Litigation Expert Blog

Bloomberg has a fascinating article on the coming changes to swap collateral under the Dodd-Frank Act. (Bloomberg)  I highly recommend you read this piece.  Here are some key takeaways:

• Starting in March, as much as 79 percent of derivatives trades... must be backed by collateral and go through clearinghouses such as CME Group;


• Traders may have to post $927 billion;


• Currently, about 40 percent of swaps are cleared by clearinghouses;


• The collateral put up for swaps trades covered by Dodd-Frank typically equals only 0.5 percent of their notional value;


• At CME, the collateral... for a 10-year interest-rate swap ranges between 2.89 percent and 4.06 percent of the trade's notional value;


• (Collateral amounts are) based on "value-at-risk", and is calculated to cover the losses a trader might suffer with a 99 percent level of confidence.  (I hope they're not still using normal distributions.);


• The Fed would backstop the clearinghouses in an emergency;


• The swaps market is 8X the futures market;