Morgan Stanley analysis: Swap clearing adds $480B of margin

A Morgan Stanley analysis revealed that banks and money managers will need an additional $480 billion to back swaps conducted through clearinghouses as mandated by the 2010 Dodd-Frank Act.

The firms could require as much as $1.3 trillion and as little as $20 billion of initial margin, which has not always been required on swaps traded outside of clearinghouses. Under Dodd-Frank, interest-rate, credit-default and other swaps are required to be processed by central clearinghouses as part of an effort to reduce counterparty risk following the 2008 financial collapse, according to Businessweek.

The new demands will be allayed by “unencumbered collateral” already present at the institutions, as well as the fact that only new trades need to be cleared and that sovereign debt assets to corporate bonds can be utilized.

Clearinghouses monitor gains and losses, collect daily margin and allow financial regulators to observe various prices and positions across the market. Mandatory clearing will be required for dealers beginning in the first quarter of 2013. The new rules further mandate that swaps not processed through a clearinghouse be backed by collateral.

“We estimate this market is approximately $170 trillion in size, which implies significantly greater potential incremental [margin growth],” analysts wrote in the report, adding that an estimated amount required to back non-cleared swaps would be included in a future report, Businessweek reports.

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