SDR Indemnification Removal: A Good Step Forward | derivatiViews

SDR Indemnification Removal: A Good Step Forward | derivatiViews

Gary here: Pretty scary stuff. Counterparties in swaps deals don't have to give information about their financial positions. Are we walking in the dark? Companies are even allowed to mask the names of counterparties. Wow, that makes me feel better, doesn't you? Not!

This is an example of privilege and risk in the derivatives markets, where globalism is king. Securitization is not limited to mortgage bonds. There are interest rate swaps, the biggest market, and energy swaps and options.

The new clearing houses require collateral. This article explains it, however more bonds are used now because of clearing house requirements:
Types of collateral

There is a wide range of possible collaterals used to collateralise credit exposure with various degrees of risks. The following types of collaterals are used by parties involved:

Government securities (often direct obligations of G10 countries: Belgium, Canada, France, Germany, Great Britain, Italy, Japan, Netherlands, Sweden, Switzerland, the US)
Mortgage-backed securities (MBSs)
Corporate bonds/commercial papers
Letters of credit/guarantees
Government agency securities
Covered bonds
Real estate
Metals and commodities

The most predominant form of collateral is cash and government securities. According to ISDA, cash represents around 82% of collateral received and 83% of collateral delivered in 2009, which is broadly consistent with last year’s results. Government securities constitute fewer than 10% of collateral received and 14% of collateral delivered this year, again consistent with end-2008.[8] The other types of collateral are used less frequently. [Gary here: long bonds as a percentage of collateral being used for derivatives deals is far greater in 2015 than in 2009. Collateral shortages are expected]

In the wake of the financial crisis of 2007-2010 and as part of the Obama financial regulatory reform plan of 2009, pressure has been placed on traders of derivatives such as credit default swaps to make their trades on an open exchange with a clearinghouse.


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