– John Kemp is a Reuters market analyst. The views expressed are his own –
By John Kemp
LONDON, April 14 (Reuters) – As much as $2 trillion of over-the-counter derivatives held at the largest banks in the United States, Europe and the rest of the world could be under-collateralised, according to a working paper published by the International Monetary Fund this month.
Banks might have to find $200 billion in initial margin and guarantee funds if standardised contracts are moved into clearing houses, and hold an extra $70 billion to $140 billion in regulatory capital to cover the non-standard contracts they retain on their balance sheets.
The findings are set out in an IMF working paper on “Collateral, Netting and Systemic Risk in the OTC Derivatives Market” by , an economist in the IMF’s Monetary and Capital Markets Department (http://www.imf.org/external/pubs/ft/wp/2010/wp1099.pdf).
The scale of the under-collateralisation, and likely increase in collateral requirements if standardised OTC contracts are moved onto centralised counterparties (CCPs) explains why Wall Street is so anxious to fight clearing requirements set out in proposed legislation on derivatives reform.