The International Swaps and Derivatives Association (ISDA) today published an analysis of credit exposure among major derivatives dealers. The report, issued at the Association’s Annual General Meeting in Boston, found that exposures among dealers are reduced to minimal levels after giving effect to netting and collateral. Major findings of the report include:
The five largest inter-dealer exposures before taking account of collateral for the top 10 dealers averaged 10% of net derivatives exposure in 2006 compared with 14.5% in 2003. These same exposures were reduced by collateral to 2% of net exposure in 2006 compared with 1.2% in 2003.
- The five largest other exposures for the top 10 dealers averaged 11% of net exposure before collateral and 6% after collateral. This sample was not analyzed in 2003.
- The five largest after-collateral inter-dealer exposures for the top 10 dealers averaged 3% of net derivatives exposure compared with 2% in 2003.
- For the largest dealers, ISDA Credit Support Annex (CSA) coverage of interdealer exposures averages 92 percent, with most reporting 100 percent. For a wider sample of dealers, average coverage is 78 percent. Before a dealer can require collateral on its counterparty exposure, the ISDA Master Agreement in place must include a Credit Support Annex.
- ISDA CSA coverage of other exposures for the top 10 dealers averages 35 percent of counterparties. For the wider sample of dealers, average coverage of other exposures is 30 percent.
The study focused primarily on the risk reducing effects of collateralization, which is in addition to the benefits firms receive through netting of counterparty transactions. Based on recent BIS numbers, netting reduces gross credit exposure by approximately 80 percent.
"This research confirms our earlier findings: the level of dealers’ exposure to each other is significantly reduced through the use of ISDA documentation and collateral arrangements," said Dr. David Mengle, Head of Research for ISDA. "In addition, the survey polls firms for the first time on their exposures to non-dealer firms. It indicates that dealers are applying the same risk mitigation techniques to these counterparties as they are to each other.”
In conducting its analysis, ISDA polled its Board member firms to determine the extent of their counterparty credit exposure to other major dealers and to other financial institutions and end-users. A questionnaire was distributed among Board members, with an assurance that all individual firm data would be treated as confidential and that only aggregate results would be shared. Eighteen firms responded, including nine of the ten largest dealers by notional amounts outstanding. The full report is available at www.isda.org.