
Banks Sprint to Meet $493 Trillion Swaps Market Margin Rules - 6stringmerc
http://www.bloomberg.com/news/articles/2016-08-22/banks-sprint-to-meet-margin-rules-for-493-trillion-swaps-market
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phantom_oracle
Financial firms dislike the idea of letting money sit idle, unless they are
getting negative rates. What happens to that $300+ billion ~ $3.6 trillion
collateral? I'm sure it will find its way into an investment as well.

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minimax
The collateral isn't limited to cash.

 _Eligible collateral for initial margin includes cash, debt securities that
are issued or guaranteed by the U.S. Department of Treasury or by another U.S.
government agency, the Bank for International Settlements, the International
Monetary Fund, the European Central Bank, multilateral development banks,
certain U.S. Government-sponsored enterprises’ (‘‘GSEs’’) debt securities,
certain foreign government debt securities, certain corporate debt securities,
certain listed equities, shares in certain pooled investment vehicles, and
gold._

From here:
[https://www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-28671.p...](https://www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-28671.pdf)

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zbobet2012
Wow, tbh invest in our (or our allies) bonds is an interesting way to
structure this for sure.

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et-al
This is news to me. What happens if the banks don't meet their collateral
requirements? A fine?

Secondly, I assume this will cause interest rates to go up as a way for banks
to incentivise people to save money?

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ChuckMcM
I was wondering if they would approach companies like Apple with a lot of off
shore cash.

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lucozade
Wouldn't at all surprise me if Apple's treasury department already lend out to
banks.

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Dwolb
Apple have their own hedge fund to help manage their assets [1].

[1]
[https://en.wikipedia.org/wiki/Braeburn_Capital](https://en.wikipedia.org/wiki/Braeburn_Capital)

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trhway
considering that mortgage CDS-es total was on the scale of only $1T and it was
enough to sink the economy...

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bjterry
Notional values can not be usefully compared between asset classes. That's why
it's so dumb that people keep reporting them in the media. Comparing $1T of
CDS to $493T of derivatives is like comparing Fahrenheit numbers to Celsius
numbers. Comparing either of those to GDP is like comparing Fahrenheit and
Calories.

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elif
What about comparing it to the world's total debt? that figure is more than
double the current debt of the entire world (230T).

Does the act of re-packaging that 230T really create an additional 263T in
value? And even if so, is that not a hopeless feedback loop?

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ddeck
I'm not sure what comparison you're trying to make. These derivatives are
typically used modify the cashflows of those instruments for different
issuer/investor preferences.

The vast majority (>90%) of that OTC derivative figure is interest rate andFX
swaps and the gross market _value_ of those swaps are less than $15 trillion.
The aggregate notional principal has also been declining for the last several
years.

Here's an example trade:

I'm a European company and I've determined there's demand for my USD fixed
rate bonds in America, but I need EUR to invest in my business and my profits
are linked to interest rates so it's less risky for me to pay a floating
interest rate.

So to _reduce_ my risk, I need to swap the bond cashflows into EUR and the
fixed rate payments into floating rate payments.

I issue $100 of bonds to US investors, and then I execute a $100 notional
fixed-floating FX swap with a bank. That bank then executes a $100 notional
fixed-fixed FX swap with another counterparty and a $100 notional (EUR equiv)
rate swap with a different counterparty.

So we have $300 notional value of OTC swaps and a $100 bond. And if we take
out the central counterparty, the three swaps actually net into a single $100
swap.

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TheOtherHobbes
What happens if any part of the chain breaks?

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ddeck
Parts of the chain break regularly. Individuals, companies, and even banks go
bankrupt.

These outcomes are expected and swap agreements are protected by collateral
under an ISMA agreement to mitigate the potential losses to counterparties
should the other counterparty default.

Now it's reasonable to argue about the amount and type of collateral required
(which is broadly the topic of the article), but aggregating all of the
notional doesn't produce a meaningful number, because it doesn't reflect the
underlying risk.

Even without the sort of hedging I described, it's impossible to draw any
meaningful understanding of the risk from the notional number. Consider the
following two contracts:

Party A sells $100 protection on a corporate to party B (i.e. CDS)

Party A enters a $100 1Y USD interest rate swap with party B, paying floating.

If the underlying corporate defaults with no recovery in the first case, it's
quite possible party A will owe $100 to party B

In the second case, there is a realistic ceiling on what can happen to USD
interest rates within the next year. Let's imagine the impossibly unlikely
scenario where the fed decided to raise rates to 5% overnight one day after
the contract was signed. Even in this situation, the value of the swap (i.e.
loss to party A) is still likely only around 5%.

