Not yelling fire August 13, 2013 at 8:13 pm

Bloomberg has a story which might be considered alarmist on a new CPSS-IOSCO consultative report (so not policy) which considers the usefulness of IM haircutting as a CCP loss mitigation tool. It’s worth quoting the full paragraph for context:

Initial margin is likely to constitute a very large pool of assets which would, if it can be used, provide a high degree of loss-absorbency. This loss-absorbency might be considered by market participants as contributing to a robust clearing system. The tool might be considered as effective, since it uses resources in the control of the CCP rather than relying on participants to meet a cash call by the CCP. Since the size of the loss faced by a participant would be capped at the size of their initial margin, this would not be an uncapped or uncontrollable exposure and participants would be able to determine their maximum loss from the use of this tool. This combination of effectiveness and high degree of loss
absorbency could provide important incentives for participation in CCPs that include this tool in their recovery plans, helping the realisation of the G20 goal of expanding clearing of standardised swaps.

How Bloomberg gets from that to ‘Derivatives traders should be prepared to lose the initial margin they post at clearinghouses’ isn’t clear to me.

2 Responses to “Not yelling fire”

  1. […] Hat tip to David at D.E.M. who spotted the combination of stories here: Deus Ex Macchiato » Not yelling fire. […]

  2. 1) Why are you attributing to Bloomberg that which Bloomberg attributes to “global market regulators”? Sure, unattributed sources are annoying, but that hardly proves they are lying.

    2) Given that you are reporting hearsay, is it really so hard to imagine what these global regulators might have meant? The point is that your claim to collateral that you post is very subordinated and you can expect to have no legal claim to it if *someone else* defaults. That is quite different from posting collateral to a tri-party custodian.