New collateral rules for hedge funds, insurers and others in the $633 trillion over-the-counter derivatives market are poised to boost demand for U.S. Treasuries, potentially slowing rising yields as the Federal Reserve considers scaling back unprecedented stimulus.
Swaps traders will need to come up with $800 billion to $4.6 trillion to meet Dodd-Frank Act regulations requiring that derivatives be backed by clearinghouses that collect upfront collateral such as cash or Treasuries, according to estimates from the Treasury Borrowing Advisory Committee. The regulations take effect today for the second group of firms designated by the Commodity Futures Trading Commission in the market for interest-rate and credit-default swaps.
"This is going to be a new, very powerful engine that drives demand for Treasuries, so you have to expect it will impact yields," said Ted Leveroni, executive director of derivatives strategy at New York-based trade-processer Omgeo LLC. "There are a lot of firms out there — I know because they've told me — that are concerned about having the available collateral."
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