The International Swaps and Derivatives Association, Inc. (ISDA) today released results from its 2012 ISDA Margin Survey at its 27th Annual General Meeting in Chicago.
The 2012 Margin Survey reveals that market participants continue to expand their use of collateral to mitigate over-the-counter derivatives credit exposures. Among large dealers, 84 percent of all transactions are now executed with the support of a collateral agreement, up from 80 percent in 2011, with 96 percent of all trades executed in the credit derivatives markets subject to collateral arrangements.
The Survey shows that 76 percent of collateral delivered by respondents for non-cleared derivatives consists of cash while the remaining 24 percent consists of government securities and other collateral.
The 2012 Margin Survey also reports that 100 percent of large dealers and 75 percent of all survey respondents indicated that they pro-actively perform portfolio reconciliations.
“Over the past 12 years, the Margin Survey has provided a consistent set of benchmarks for collateral use,” said Robert Pickel, ISDA Chief Executive Officer. “As the survey clearly demonstrates, collateralization remains among the most widely used methods to mitigate counterparty credit risk in the OTC derivatives market, and market participants have increased their reliance on collateralization over the years. In an evolving regulatory environment that seeks to reduce the counterparty risk associated with derivatives, the continued use of bilateral collateralization has, in the same way as clearing, an important role to play in risk mitigation.”
The role of central counterparties (CCPs) in clearing trades and in managing collateral is of growing importance. This year, the Survey asked 14 large dealers to indicate their levels of collateralization with central counterparties. The 2012 Margin Survey reports that the large dealers delivered approximately $50 billion of collateral as margin in central counterparties: $49.6 billion in their executing broker capacity and $0.7 billion in their clearing member capacity.
The 2012 Margin Survey also shows that active collateral agreements number almost 138,000, of which 85 percent are ISDA agreements.
Collateralization, the increase in clearing, and the effectiveness of netting and portfolio compression all work toward the same goal – reducing counterparty risk. Gross credit exposure of OTC derivatives after netting and collateral is approximately 0.1 percent of outstanding notional amounts. Significant progress in each of these areas has been achieved and continues to be made as the industry works proactively and cooperatively with regulators and policy makers globally.
Of the 51 firms responding to the 2012 ISDA Margin Survey, 43 are banks or broker-dealers. The remaining participants consisted of hedge funds, insurers, government agencies and government-sponsored entities.
Each year the Margin Survey evolves slightly to reflect market developments, and thus in the 2012 Survey more attention is paid to collateralization of cleared derivatives, in addition to coverage of the bilateral, uncleared market. The Margin Survey is part of a broader set of ISDA initiatives in the area of collateral, including documentation, best practices and practitioner guidelines.
