A transparency standard for derivatives
AbstractDerivatives exposures across large financial institutions often contribute to – if not necessarily create – systemic risk. Current reporting standards for derivatives exposures are nevertheless inadequate for assessing these systemic risk contributions. In this paper, the author explains how a transparency standard, in contrast to the current standard, would facilitate such risk analysis. He also demonstrates that such a standard is implementable by providing examples of existing disclosures from large dealer firms in their quarterly filings. These disclosures often contain useful firm-level data on derivatives, but due to a lack of standardisation, they cannot be aggregated to assess the risk to the system. He highlights the important contribution that reporting the “margin coverage ratio”, namely the ratio of a derivatives dealer’s cash (or liquidity, more broadly) to its contingent collateral or margin calls in case of a significant downgrade of its credit quality, could make toward assessing systemic risk contributions.
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Bibliographic InfoArticle provided by Banque de France in its journal Financial Stability Review.
Volume (Year): (2013)
Issue (Month): 17 (April)
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- Robert L. McDonald, 2012. "Measuring Margin," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling, pages 65-82 National Bureau of Economic Research, Inc.
- María Rodríguez-Moreno & Sergio Mayordomo & Juan Ignacio Peña, 2012. "Derivatives Holdings and Systemic Risk in the U.S. Banking Sector," Faculty Working Papers 21/12, School of Economics and Business Administration, University of Navarra.
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