Improving Systemic Collateral Efficiency Darrell Duffie Stanford University Collateral and Financial Plumbing Brooking Institution February 2015 Duffie Improving Systemic Collateral Efficiency
Framing the Issue ◮ Collateralization lowers counterparty risk. ◮ Increasing collateral requirements has a shadow price, and also implies transfers from dealer shareholders to dealer creditors. ◮ Dodd-Frank Title VII and MiFID is part of a G20 mandate for central clearing and broader collateral requirements on non-cleared derivatives. New regulatory capital requirements push both ways. ◮ Dealers are charging ahead with major improvements in collateral efficiency, including trade compression and central clearing of derivatives, repos, and securities lending. Duffie Improving Systemic Collateral Efficiency
Some of the funding value adjustments of major dealers (millions). Table: Source : Andersen, Duffie, and Song (2015). Amount Date J.P. Morgan Chase $1,500 Q4 2013 BAML $497 Q4 2014 Citi $474 Q3 2014 Morgan Stanley $468 Q4 2014 Credit Suisse Fr279 Q4 2014 UBS Fr267 Q3 2014 RBS $475 Q4 2012 Deutsche Bank e 366 Q4 2013 Barclays £75 Q4 2012 Lloyds e 143 Q4 2012 Nomura $98 Q4 2013 Goldman Sachs NA Q4 2012 Duffie Improving Systemic Collateral Efficiency
c 1 c 2 c 5 d 1 c 3 c 6 d 2 d 3 c 7 c 4 Duffie Improving Systemic Collateral Efficiency
c 1 c 2 d 1 ccp c 5 c 3 c 6 d 2 d 3 c 7 c 4 Duffie Improving Systemic Collateral Efficiency
since December Chart 4: Gross Notional Outstanding Volume: Interest Rate Derivatives, US$ trillions ISDA (2015) 800 Before compression 700 600 BIS data 500 After compression 400 300 After compression, adjusted for clearing 200 100 0 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14
Chart 3: TriOptima triReduce Period Compressed Volume: CCP and Non-CCP Trends, US$ trillions 60 50 40 30 20 10 0 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Non-CCP CCP ISDA (2015)
30 Dealer Initial Margin Dealer Short Charge 28 Customer Initial Margin Collateral demand (percent of net notional) Customer Short Charge 26 Variation margin buffer 24 Variation margin drag 22 20 18 16 14 12 10 8 6 4 2 0 No clearing / No clearing / Full clearing / Full clearing / Full clearing / Full client No D-to-D IM D-to-D IM 2 CCPs 4 overlapping CCPs 10 days IM clearing Source: Duffie, Scheicher, Vuillemey (2015) Duffie Improving Systemic Collateral Efficiency
ISDA (2015) Table 1: Gross Notional Outstanding Volume: Interest Rate Derivatives, US$ trillions Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 (RGNO) BIS Reported 393.1 432.1 449.9 465.3 504.1 494.4 489.7 561.3 584.4 563.3 Gross Notional Outstanding (AFCT) Adjustment 54.4 75.8 107.7 124.2 141.9 152.8 170.7 201.8 227.7 230.6 Factor for Cleared Transactions LCH.Clearnet (single- 54.4 75.8 107.7 124.2 141.9 152.8 170.7 195.5 213.0 206.8 counted) gross notional outstanding CME gross notional n/a n/a n/a n/a n/a n/a n/a 3.0 9.1 15.6 outstanding JSCC gross notional n/a n/a n/a n/a n/a n/a n/a 3.3 5.6 8.2 outstanding (AGNO) Adjusted Gross 338.7 356.3 342.2 341.1 362.2 341.6 319.0 359.5 356.7 332.7 Notional Outstanding Pct (%) Cleared Gross 16.1% 21.3% 31.5% 36.4% 39.2% 44.7% 53.5% 56.1% 63.8% 69.3% Notional Outstanding Chart 1 compares the RGNO and AGNO of interest rate derivatives. From December 2007
Appendix : Illustrating Collateral in Flight Duffie Improving Systemic Collateral Efficiency
Margin buffering b 0 Duffie Improving Systemic Collateral Efficiency
Velocity Drag and Precautionary Buffers investor 1 d 1 b 1 investor 2 d 2 b 2 investor 3 d 3 b 3 Duffie Improving Systemic Collateral Efficiency
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