The Securities Litigation Expert Blog

Swapalypse Now

Posted by Jack Duval

Dec 26, 2012 2:31:20 AM

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;

Read More

Topics: Bloomberg, Swaps, value-at-risk, clearinghouse, investments, collateral, Compliance, Dodd-Frank Act

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