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A transparency standard for derivatives

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  • Acharya, V. V.

Abstract

Derivatives 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.

Suggested Citation

  • Acharya, V. V., 2013. "A transparency standard for derivatives," Financial Stability Review, Banque de France, issue 17, pages 81-89, April.
  • Handle: RePEc:bfr:fisrev:2011:17:08
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    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/financial-stability-review-17_2013-04.pdf
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    Cited by:

    1. Mayordomo, Sergio & Rodriguez-Moreno, Maria & Peña, Juan Ignacio, 2014. "Derivatives holdings and systemic risk in the U.S. banking sector," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 84-104.
    2. 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.
    3. 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.

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