Clearing the Way for Clearing: Cost vs. Benefits to End-Users

ISDA put out a great summary of some of the key issues on the future of clearing OTC derivatives versus the current benefits of bilateral collateral arrangements that exist today (http://isda.derivativiews.org/2012/04/24/the-bilateral-world-vs-the-cleared-world/), highlighting additional margin, capital charges, documentation and players.

There has been much discussion already about the initial margin hit that end-users will take and hopefully the Senate will pass the House bill to exempt end-users from the margining requirements under Dodd-Frank.  The time and costs to get the legal documentation in place has probably not been fully realized by non-financial end-users as most do not have CSAs in place and the concept will be new to them, whether it’s for clearing or bi-lateral.

The billion dollar question is whether all of these costs borne by Swap Dealers and clearing firms, and passed on to end-users as well as end-users’ own costs, will be offset by the benefits of greater transparency and liquidity derived from these regulations.  Time will tell, but I expect that the proposed benefits, should they materialize, will be many years away for end-users.