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 (, 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.