The International Swaps and Derivatives Association claims the financial reform bill, as its exists now, will require traders to post collateral for all over-the-counter derivatives that are not cleared, including those involving an end-user.
In a long-winded research note the association wrote “About $400 billion would be needed as collateral that corporations could be required to post with their dealer counterparties to cover the current exposure of their OTC derivatives transactions. ISDA estimates that $370 billion represents the additional credit capacity that companies could need to maintain to cover potential future exposure of those transactions. If markets return to levels prevailing at the end of 2008, additional collateral needs would bring the total to $1 trillion.”The analysis also claims “To assess the impact of this provision, ISDA’s Research team analyzed year-end 2009 data available from the Office of the Comptroller of the Currency regarding derivatives exposure and margining. The Association’s analysis is based in part on this data and also includes assumptions and estimates regarding corporate end-user exposure, required margin levels and other factors. ”
The research may not be entirely unbiased. The ISDA lobbies on behalf of the privately negotiated derivatives industry and has 820 members in 87 countries.
The ISDA study is another example of the reams of data and analysis that has come out in favor or against the financial reform bill. Much of the research is contradictory as constituents that may be affected by its passage jockey to dodge those parts of the bill that are unfavorable to their interests.
The bill will be imperfect because, among other things, it runs 1,000 pages. The regulators who have to carry out the provisions of the new law are ill-prepared to do so and may stagger under the complexity of the programs created by the bill. As many observers have pointed out, the lobbying has just begun and will shortly move from legislators to regulators. It is certain that the ISDA will be one of the organizations that will be there for the fight whether its $1 trillion figure is right or not.
Douglas A. McIntyre
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