Demand for Swaps Collateral Could Bolster Bonds

New collateral rules could slow rise in Treasury yields.

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.

‘Better System’

“It’s quite possible that there’s a tremendous amount of efficiencies when large financial institutions bring their swaps into one or two or three clearinghouses, rather than have these bilateral relationships,” he said. While “it has a cost,” he said, “it’s a far better system.”

Global Regulation

Total demand stemming from additional collateral that will be needed to meet all new market regulations and global capital and liquidity rules for banks may reach $11.2 trillion, according to estimates by the committee in documents presented at its May meeting with Treasury officials.

Stocks, Gold

Other collateral that can be posted to back cleared swap trades includes stocks, corporate bonds and gold, all of which are given greater discounts, or haircuts, than Treasuries, diluting their value in a collateral arrangement.

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