The Present Value

ISDA highlights a selection of research papers on derivatives and risk management


Introducing ENNs: A Measure of the Size of Interest Rate Swap Markets

Richard Haynes, John Roberts, Rajiv Sharma, and Bruce Tuckma

This paper introduces Entity-Netted Notionals (ENNs) as a new metric to measure the size of IRS markets. By normalizing notional amounts into 5-year equivalents and then netting longs and shorts within pairs of counterparties, ENNs capture the market risk transfer in IRS markets much more accurately than notional amounts. The authors estimate that the size of the interest rate swap market—measured with ENNs—was only $15 trillion for all U.S. reporting entities as of December 15, 2017. This ENN measure represents just over 8% of $179 trillion outstanding notional amount across the major IRS products, including fixed-for-floating swaps, FRAs, OIS, and swaptions. A possible policy implication of the paper is to use a metric like ENNs instead of or in addition to notional amounts to set regulatory thresholds.

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The Demand for Central Clearing: To Clear or Not to Clear, that is the Question

European Systemic Risk Board Working Paper Series
Mario Bellia, Roberto Panzica, Loriana Pelizzon, Tuomas Peltonen

This paper analyzes whether the post-crisis regulatory reforms have created appropriate incentives for different types of market participants to centrally clear over-the-counter (OTC) derivative contracts. The authors analyze main drivers for the decision to clear, including the liquidity and riskiness of the reference entity, the credit risk of the counterparty, the clearing member’s portfolio net exposure with the CCP. The analysis focuses on transactions on sovereign CDS in 2016, and in particular, the most traded European sovereign CDS: Italy, France and Germany. The study demonstrates that the large majority of the transaction cleared are between CCP clearing members, while there is almost no evidence of clearance of transactions by non-clearing members, independently whether they are subject to capital requirements or not. The paper shows that factors impacting the incentives for central clearing are not the same for all analyzed CDS reference entities and the decision to clear is also related to net exposure with the CCP, in addition to the characteristics of the contract and the counterparty credit risk.

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Collateral Reuse and Balance Sheet Space

IMF Working Paper No. 17/113
Manmohan Singh

This paper analyzes collateral flows from the perspective of repo market as well as securities-lending, derivatives, and prime-brokerage markets. The paper explains the concept of pledged collateral, key sources and uses in the pledged collateral market and shows the dual impact of QE and other regulations on the collateral market. The author points out that the incremental demand for collateral that is driven by regulations such as liquidity and leverage ratios is likely too far exceed the incremental supply from better collateral connectivity and new debt issuance. The author warns that as central banks unwind their balance sheets in the future, they should be mindful of the effect of their actions on the ability of markets to intermediate collateral. The paper concludes with some policy suggestions that could improve functioning of the collateral market.

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