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Under-collateralisation and rehypothecation in the OTC derivatives markets

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  • Singh, M.

Abstract

At present there is sizable activity in the OTC derivatives market that is under-collateralised. The margin/collateral requirements at central counterparties (CCPs) should help the OTC derivatives market be better collateralised, lowering the derivatives risk at the large banks that dominate this market. However, the overall netting benefits may be less if the several CCPs that are in operation are not linked. Also, large banks make very effective use of collateral they receive that has rehypothecation rights.1 This implies that overall cost to large banks in moving OTC derivatives to CCPs will be sizable.

Suggested Citation

  • Singh, M., 2010. "Under-collateralisation and rehypothecation in the OTC derivatives markets," Financial Stability Review, Banque de France, issue 14, pages 113-119, July.
    • Handle: RePEc:bfr:fisrev:2010:14:13
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    Cited by:

    1. Duffie, Darrell & Scheicher, Martin & Vuillemey, Guillaume, 2015. "Central clearing and collateral demand," Journal of Financial Economics, Elsevier, vol. 116(2), pages 237-256.
    2. Guillaume Vuillemey, 2015. "Derivatives markets : from bank risk management to financial stability [Les marchés de dérivés : gestion des risques bancaires et stabilité financière]," SciencePo Working papers Main tel-03507099, HAL.
    3. Sakurai, Yuji & Uchida, Yoshihiko, 2014. "Rehypothecation dilemma: Impact of collateral rehypothecation on derivative prices under bilateral counterparty credit risk," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 361-373.
    4. Guillaume Vuillemey, 2015. "Derivatives markets : from bank risk management to financial stability [Les marchés de dérivés : gestion des risques bancaires et stabilité financière]," SciencePo Working papers tel-03507099, HAL.
    5. Vuillemey, G. & Breton, R., 2014. "Endogenous Derivative Networks," Working papers 483, Banque de France.

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