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.

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:

  • Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
  • Informative weekly newsletter featuring news, analysis, real-world case studies, and other critical content
  • Educational webcasts, white papers, and ebooks from industry thought leaders
  • Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.