April 10, 2013

Central Bank Survey | Optional Moves to CCPs

According to a survey contained in RBS Reserve Management Trends 2013, published on April 8th (£250 per copy), 19 out of 50 central banks are considering moving to CCPs for OTC derivatives instruments such as interest rate swaps, even though they are specifically exempt from doing so under Dodd-Frank and EMIR. If this starts a trend for other central banks to follow, dealers should rejoice for several reasons:

  • Dealer funding costs would be reduced (see note 1 below)
  • Pro-Cyclicality issues (note 2) and/or uncertainties around CVA exemptions (proposed in CRD IV) (note 3) would be eliminated

According to Risk Magazine (subs), however, some central banks are, by law, restricted from posting collateral or margin on their trades. This precludes them from moving to central clearing. That being said, the 19 central banks considering a move to CCP clearing are setting a positive example for governments, international institutions and other clearing-exempt institutions to act in the common interests of the global financial system, if they are reasonably able to do so. Ben L.

  1. As one would not have to consider FVA costs on an uncollateralised portion of a portfolio. Also, there would be no collateral gaps due to the terms and conditions of a one-way CSA agreement.
  2. If there's CVA exemption for trades conducted with institutions exempt from mandatory clearing, then CDS spreads on the counterparty may spiral upwards as CDS protection is brought to hedge CVA on the uncollateralised exposure, which in turn drives up the CVA charge, which in turn leads to more CDS protection buying
  3. If European banks are exempt from the CVA charge, then this may lead to regulatory distortions as banks in other jurisdictions are not exempt. In addition, CRD IV rules have not been finalized and there's some uncertainty as to whether longer-dated trades will be exempt from CVA charges.

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