ISDA®
INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC.
NEWS RELEASE
For Immediate Release, Tuesday, June 29, 2010
For More Information, Please
Contact:
Cesaltine Gregorio, ISDA New York,
+1 212-901-6019, cgregorio@isda.org
Deirdre
Leahy, ISDA New York, +1 212-901-6021, dleahy@isda.org
Donna Chan, ISDA Hong Kong, +852
2200 5906, dchan@isda.org
Rebecca O'Neill, ISDA London, +44
203 088 3586, roneill@isda.org
US Companies
May Face US $1 Trillion in Additional Capital and Liquidity Requirements As a
Result of Financial Regulatory Reform, According to
ISDA Research
NEW
YORK, Tuesday, June 29, 2010 – A change in the wording of the financial reform bill
now being finalized in the US Congress could cost US companies as much as $1
trillion in capital and liquidity requirements, according to research by the International Swaps and Derivatives
Association, Inc. (ISDA). About
$400 billion would be needed as collateral that corporations could be required
to post with their dealer counterparties to cover the current exposure of their
OTC derivatives transactions. ISDA estimates that $370 billion represents the
additional credit capacity that companies could need to maintain to cover
potential future exposure of those transactions. If markets return to levels
prevailing at the end of 2008, additional collateral needs would bring the
total to $1 trillion.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act could lead to a
requirement of initial and variation margin (also referred to as collateral
posting) for all over-the-counter (OTC) derivatives that are not cleared,
including those involving an end-user. The legislation presented to the
conference committee would have explicitly exempted corporate end-users from
margin requirements on such transactions. This exemption is no longer in the
bill. If the bill is passed without this exemption, regulators could
significantly increase the costs of hedging exposures.
To assess
the impact of this provision, ISDA’s Research team analyzed year-end 2009 data
available from the Office of the Comptroller of the Currency regarding derivatives
exposure and margining. The Association’s analysis is based in part on this
data and also includes assumptions and estimates regarding corporate end-user
exposure, required margin levels and other factors.
“The
margining requirements for corporate end-users as currently drafted in the bill
runs the risk of imposing a significant cost on US companies and could impede
their ability to manage their business and financial risks,” said Conrad Voldstad,
ISDA Chief Executive Officer. “These
provisions would increase rather than decrease risk. They work against the
bill’s main purpose, which ISDA clearly supports, of enhancing financial
stability and strengthening our financial system.”
At
year-end 2009, the notional value of derivatives held by US commercial banks
totaled $213 trillion according to the OCC. Assuming 10% of this amount
reflects corporate end-user activity, and that the initial margin requirement
would be 1% (a typical level) of the notional amount, then US companies would
face a $213 billion collateral requirement.
In
addition to initial margin, US companies could also face variation margin
requirements under the bill. According to the OCC, the Net Current Credit
Exposure (NCCE) of US banks at year-end 2009 was $398 billion. Of this amount,
41% or $163 billion was related to corporate users of OTC derivatives. Approximately
31% of this amount was collateralized and 69% or $112 billion was not
collateralized.
In
addition to the approximately $325 billion in initial ($213 billion) and
variation ($112 billion) margin that US companies could face related to their
OTC derivatives transactions with US banks, they would also be required to post
margin for their transactions with non-US banks. Using a conservative estimate
of non-US banks’ share of the US corporate derivatives market, ISDA’s analysis
indicates that the cash and liquidity requirements of US companies might
increase by about another $81 billion to $406 billion.
ISDA’s
analysis also considered collateral requirements that US companies would face
with regard to the Potential Future Exposure (PFE) of their bank counterparties.
PFE is a metric that the OCC requires banks to estimate and represents the
potential change in derivatives exposure that banks might face on their
transactions with clients. In order to be prepared for possible variation
margin calls resulting from rising OTC derivatives exposure, prudent companies
would most likely arrange for back-up credit facilities or set aside existing
cash that might otherwise be used to expand their businesses and create jobs. For
all users of derivatives, Potential Future Exposure was $723 billion. Assuming
that 41% of this Potential Future Exposure relates to corporate (as it does for
NCCE), corporations could face an additional liquidity requirement of $370
billion, including $296 billion on their PFE with US banks and $74 billion with
non-US banks.
ISDA’s
research also noted that since the end of 2008, the net current credit exposure
(NCCE) of US banks has fallen by about $400 billion. If a period of severe
market turmoil was to occur, the NCCE could increase. This could mean several
hundred billion dollars of additional collateral requirements for end-users and
bring the final total to $1 trillion.
The
following table summarizes ISDA’s analysis of the potential capital and
liquidity requirements that US companies would face as a result of any
collateral requirements imposed as a result of the financial regulatory reform
legislation:
Initial margin to US banks $ 213 billion
Variation margin to US banks
112
Initial margin to non-US
banks 53
Variation margin to non-US
banks 28
Total margin required: $ 406 billion
PFE credit facility:
US banks $ 296
Non-US banks 74
Total PFE credit facility: $ 370 billion
Total capital / credit required: $
776 billion
About ISDA
ISDA, which represents participants
in the privately negotiated derivatives industry, is among the world’s largest
global financial trade associations as measured by number of member firms. ISDA
was chartered in 1985, and today has over 820 member institutions from 57
countries on six continents. These members include most of the world’s major
institutions that deal in privately negotiated derivatives, as well as many of
the businesses, governmental entities and other end users that rely on
over-the-counter derivatives to manage efficiently the financial market risks
inherent in their core economic activities. Information about ISDA and
its activities is available on the Association's web site: www.isda.org.
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Association, Inc.