BofA’s derivatives move – facts and fallacies October 21, 2011 at 6:25 am
Goodness me there are some fishy things being written about BofA moving their derivatives to the retail bank (which of course has FDIC insured deposits). Some of the things that are not true include ‘If a retail bank is a derivatives counterparty, then it doesn’t need to post nearly as much collateral’ and ‘The derivatives aren’t themselves insured by the FDIC, but they have extremely senior status, which means that the bank can use its deposit base to pay off derivatives counter parties.’ (These actually consecutive sentences too – clearly Reuters does not bother to fact check blogs.)
What is true is that a retail bank often has rather better liquidity than a broker/dealer. This alone makes it safer, and hence (assuming that liquidity does not get spread around the rest of the group – something that should not happen too much) the retail bank is more attractive as a derivatives counterparty. Note though that these days everyone uses the same interdealer CSA (zero threshold, daily margin, cash only), so there is no collateral advantage to being in the retail bank; moreover being in a retail bank doesn’t suddenly make derivatives super senior; they are just good only fashioned pari passu with senior debt, the way they always were – and not FDIC-protected.