Skip to comments.The Real "Margin" Threat: $600 Trillion In OTC Derivatives, A Multi-Trillion Variation Margin Call
Posted on 06/06/2011 6:06:00 AM PDT by OpusatFR
While the dominant topic of conversation when discussing margin hikes (or reductions) usually reverts to silver, ES (stocks) and TEN (bonds), what everyone so far is ignoring is the far more critical topic of real margin risk, in the form of roughly $600 trillion in OTC derivatives.
The issue is that while the silver market (for example) is tiny by comparison, it is easy to be pushed around, and thus exchanges can easily represent the illusion that they are in control of counterparty risk (after all, that was the whole point of the recent CME essay on why they hiked silver margins 5 times in a row). Nothing could be further from the truth: where exchanges are truly at risk is when it comes to mitigating the threat of counterparty default for participants in a market that is millions of times bigger than the silver market: the interest rate and credit default swap markets.
As part of Dodd-Frank, by the end of 2012, all standardised over-the-counter derivatives will have to be cleared through central counterparties. Yet currently, central clearing covers about half of $400 trillion in interest rate swaps, 20-30 percent of the $2.5 trillion in commodities derivatives, and about 10 percent of $30 trillion in credit default swaps. In other words, over the next year and a half exchanges need to onboard over $200 trillion notional in various products, and in doing so, counterparites, better known as the G14 (or Group of 14 dealers that dominate derivatives trading including Bank of America-Merrill Lynch, Barclays Capital, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, RBS, Societe Generale, UBS and Wells Fargo Bank) will soon need to post billions in initial margin, and as a brand new BIS report indicates, will likely need significant extra cash to be in compliance with regulatory requirements.
Not only that, but once trading on an exchange, the G14 "could face a cash shortfall in very volatile markets when daily margins are increased, triggering demands for several billions of dollars to be paid within a day." Per the BIS "These margin calls could represent as much as 13 percent of a G14 dealer's current holdings of cash and cash equivalents in the case of interest rate swaps." Below we summarize the key findings of a just released discussion by the BIS on the "Expansion of central clearing" and also present a parallel report just released by BNY ConvergEx' Nicholas Colas who independetly has been having "bad dreams" about the possibility of what the transfer to an exchange would mean in terms of collateral posting (read bank cash payouts) and overall market stability, and why a multi-trillion margin call could result in the biggest buying spree in US Treasurys... Ever
Too true. The financial sector has been out of control for so long that attempting to enforce sound fiscal policy will tank it. “Too Big To Regulate”, I suppose. Best to let them continue to run wild, and just hope your tit doesn’t get caught in the wringer when it collapses again (and again, and again).
al Qaeda in America:
"We will continue to fund Sharia, IAG, and terrorists
with YOUR money. We own YOUR children, dhimmis."
You have more raw nerve than I do.
I saw that earlier & didn’t dare post it, fearing I’d be a “carrier.” Carrier of the ulcer I got reading it, I’m afraid.
I hope that a President Palin-type puts the banks on notice, once the election is over:
“If you are Too Big To Fail, you are too big to exist. Period. You’ll either break yourself up into bite-sized pieces or I’ll have the courts do it for you. Got it? Did I already mention that not ONE BLOODY DIME of taxpayer dollars will be available to bail you out of your gambling? I’ll veto any bill that attempts to do so, and you won’t be able to override it.”
Any halfway measures, any compromises, any "sensible" options will be the ones proposed by the Crony Capitalists for their own benefit. We need to just reject anything that smacks of deal-making.
While this is certainly a technical subject, this article has to be some of the most poorly written composition I’ve seen in a while. His first paragraph has 459 words, which I think only Victor Hugo (Les Misérables) could pull off in a coherent manner.
Yes, it’s loaded to the brim with content, but in such an incoherent form as to be almost unreadable. Which is a pity, because I can tell he has a bunch of points to make.
the ulcer I got reading it, Im afraid.
And now you know why banks have been accumulating cash rather than making loans.
An interesting issue not addressed in the article is the question of what happens when the Fed ceases printing massive amounts of money through quantitative easing.
In this case, interest rates soar, Treasury prices crash, the TBTF banks have to pony up tens (possibly hundreds) of billions in new cover. Meanwhile, precious metal prices increase several hundred times ... at the exact time when the TBTF idiots have shorted tens of thousands of PM contracts in order to manipulate the PM price down in order to postpone the day of reckoning for their past PM manipulation schemes.
Can the Fed even print enough specie to clean up this mess without triggering a complete dollar collapse? Anybody on this forum still dumb enough to buy Citi, BoA, Wells, or the JP Morgue?
Stay tuned sports fans. This drama is getting more interesting by the minute.
Classic management aphorism: if someone is irreplaceable, replace them.
The Bigger the Bank, the Worse it Is.
I saw this article yesterday and immediately
recognized the Horror of it's import
When this goes, it will be Hugh!
I caught a show on CNBC the other day. It was focused on currency trading. The panel would talk about what trade they would make, and then talk about the cost of the trades.
In pure dollars, if you paid full boat for the trades they would return 1-2%. But, because of the leverage of margins, they would make between 115-200% on these trades.
Of course you have to start with tons of cash to get the margin, but this is why the big trades just get bigger and bigger.
It isn’t legalized theft, but it IS legalized gambling.
Always remember: the Fed is totally about propping up the big insolvent banks with their phony asset balances. However, the Fed just hides behind a false facade of acting in the national interests. Watch what they do; pay little attention to what they say is their motivation. Currently, they "must" prop up certain asset classes so that their Bank masters don't get wiped out from a huge collapse in their derivatives exposure.
Just another form of stealth financial repression of the masses by the financial and federal fascist elites.
The plain fact is that a lot of greedy people manipulated the system and it is going to crash.
There is no way out of this. The pity is that it should have happened three years ago and by now, the damage would be on its way to recovery.
Now, we have a crisis coming that will be long, hard, unendurable, and many more are going to be lost without any way to turn.
Oh, except for our politicians, the financial class, and a select bunch of banks, lobbyists and friends of Barney and Dodd.
Always remember: the Fed is totally about propping up the big insolvent banks with their phony asset balances.
But the DONK (aka Dodd Frank) was all about solving problems like derivatives. And shades of Enron, Batman, SOX was all about ending things like Mark to Make Believe. And Helicopter Ben promised there would be no more QE and he was 100 percent sure he could control inflation.
In other words, it sounds like you have about as much confidence in the b*st*rds as I do.
Yeah... my eyes glazed over and brain went into neutral within 10 seconds.
A coherent translation someone ?