Rate Derivatives Margin Rules

Users may have to set aside $1.4 Trillion under Dodd-Frank, consultancy reports.

Interest-rate derivative users may have to set aside at least $1.4 trillion in margin payments under new rules mandated by the U.S. Dodd-Frank Act, according to research firm Tabb Group.

The costs will come in the next three to five years as derivatives based on interest-rates such as swaps are required to be processed by clearinghouses to reduce risk in the $465 trillion market, E. Paul Rowady, a TABB senior analyst, said in a report today. Clearinghouses collect daily margin, monitor prices on trades and help settle defaults. LCH.Clearnet Ltd., the world’s largest interest-rate swap clearinghouse, has processed voluntary bank-to-bank trades since 1999.

“Although dealers have readily adopted clearing for the most vanilla segment of their OTC derivative portfolios, these exposures require comparatively little initial margin since they represent the cream of the proverbial crop,” Rowady said in the report. For more complex types of rate derivative trades, the new costs may be prohibitive and lead “to the outright extinction” of some of these transactions, he said.

The Commodity Futures Trading Commission and Securities and Exchange Commission are writing the rules now for the swap market based on last year’s Dodd-Frank Act.


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