News: Cross margining benefits. Are they for all?

20 June 2013 | Maria Leontiou

A really comprehensive paper by CME was published this month (June), which amongst others, emphasises the benefits of cross margining, saying that $1 billion in initial margin savings have been achieved.  It also shows examples of savings achieved by keeping hedge positions in the same clearing house ranging from 67% to 89%. I can't help thinking though that these savings work well only for hedged portfolios. A 2 year IRS versus a Weighted Eurodollar Strip showed margin of 10 times more when held in different clearing houses and not cross-margined versus held in the same clearing house and netted.What about directional players, like investment managers, that have no offsetting positions?Where are the cross netting savings in their case? The pdf can be found here, original page here: http://www.cmegroup.com/trading/interest-rates/cleared-otc-interest-rate-swaps-overview.html Maria L.


I did think this was a re-post, Maria persuaded me to give it an airing. It's marketing of course but useful to stimulate thought.

CME roll this report out (updated) each month but it's worth the read if you haven't seen it before.I am always slightly sceptical of 'netting benefits' sung from an exchange's hymn sheet - especially CMEs! - but the numbers say it all really: "$1 billion in initial margin savings have been achieved" in a world of supposed collateral needs that is $2-4 trillion or whatever big figure you want to pick?!And as you rightly say, how much of OTC is hedged anyway? The miss-matches across the short-dated buckets of a dealer's portfoIio is about all I can think of that might benefit from 2yr IRS / STIR margin netting but dealers will generally keep this as flat as possible anyway because of the basis risk.

Reblogged this on Carl A R Weir's Blog.