A new ISDA survey explain the flows of margin for cleared and uncleared OTC products

Announced today is a new ISDA survey on the flows of margin for cleared and un-cleared margin. The data comes from 18 banks who make up 'phase 1' of the uncleared margin regulations and seven CCPs, covering IRS & CDS products only. The data relates to the portfolio of trades the 18 have with each other in clearing our outside only, and exclude the trades they have outside that group of 18 which would include a large number of other banks and buy-side firms, some of which are yet to be in-scope for IM exchange. Two of the top twenty banks did not respond so the survey uses estimation to add back their data.

The total IM for cleared at $173bn versus $107bn for uncleared is the opposite way around I would expect – cleared business is within a multi-lateral net calculation and subject to IM models which have been refined over many years and I would have expected that figure to be lower than the bilaterally net uncleared portfolio. The uncleared products are calculated via the ISDA SIMM which is a newish model and quite different in approach from those used in clearing. What does this say about the amount of risk in clearing, given that recent estimates are that 80% of OTC products are in clearing, does that mean they are higher risk? 

Full announcement below:

The International Swaps and Derivatives Association, Inc. (ISDA) has published a new survey on margin payments in the over-the-counter derivatives market, which shows that approximately $1.41 trillion of collateral was posted for cleared and non-cleared trades by the end of the first quarter of 2017.

(Of this amount, initial margin (IM) posted by clearing participants to central counterparties (CCPs) for their cleared derivatives trades totaled $173.4 billion. IM posted to the 20 largest market participants for their non-cleared derivatives transactions totaled $107.1 billion. Variation margin (VM) posted totaled $1.13 trillion, with $260.8 billion for cleared and $870.4 billion for non-cleared.)

The analysis reflects significant changes to collateral practices in cleared and non-cleared derivatives markets over recent years. In September 2016, the 20 largest derivatives dealers had to meet new regulatory margin requirements for their non-cleared trades. These rules were expanded to the second phase of derivatives users on September 1, 2017, and will be phased in for ever-broader circles of market participants until 2020. All in-scope entities are now also subject to variation margin requirements.

Clearing volumes have also grown rapidly since the financial crisis, resulting in an increase in collateral posted to CCPs. Approximately 76% of interest rate derivatives notional outstanding was cleared at the end of 2016, according to the Bank for International Settlements.

“ISDA’s margin survey shows that the industry has made great strides to make the derivatives market safer and more robust. Posting collateral reduces counterparty risk, makes the industry as a whole more resilient, and meets a key Group of 20 requirement for financial reform,” said Scott O’Malia, ISDA’s Chief Executive.

• IM and VM posted by clearing participants to CCPs for cleared interest rate swaps (IRS) and credit default swaps (CDS) totaled $434 billion at the end of March 2017. IM and VM posted with the top-20 dealers for their non-cleared derivatives totaled $977.5 billion
• The 20 largest dealers delivered $63.6 billion of IM in total and received $107.1 billion of IM for their non-cleared derivatives transactions. VM delivered by these firms totaled $685 billion and VM received was $870.4 billion.
• The amount of IM delivered to CCPs for cleared IRS and CDS totaled $173.4 billion. VM posted to CCPs by market participants for cleared IRS and CDS at the end of the first quarter of 2017 was approximately $260.8 billion.
• The $1.41 trillion total excludes margin posted on cleared products other than IRS and CDS, and also excludes margin on non-cleared derivatives exchanged between non-top-20 firms.

To collect this data, ISDA surveyed the 20 banks with the largest non-cleared derivatives exposures – the so-called ‘phase-one’ firms under the new margin rules. ISDA also used publicly available data on cleared derivatives from two US CCPs, three European CCPs, and two Asian CCPs.

Full report attached below, and also here in the ISDA website