Three-Fifths Of OTC Derivatives Could Be Cleared, Says Citi (Dow Jones)

By | July 15, 2011

Citi has a new study geared towards helping its clients prepare for Dodd-Frank.  The two most interesting parts are their estimates for overall growth in IRS and CDS outstanding notional (to $435 trillion by 2013) and their estimates for how much of the OTC derivatives market will be cleared (~60%).  I’ll withhold my opinions on the former, but I do tend to agree with the latter.  The mental path I’ve taken to get to 60-70% is a bit different however.  I’m less sure that “most” of the CDS market will be cleared. I think there are just too many unanswered questions to clear a product that can be so difficult to accurately value.  More on that another time…

Independent research and advisory firm TABB Group estimates that 90% of interest rate swaps could be cleared, but has not provided figures on other asset classes. Kevin McPartland, a principal at TABB and director of fixed income research, said with rates making up such a large part of the swaps market, about 60-70% of OTC derivatives could be cleared overall.

In the end, he added, it will come down to how accurately clearinghouses can price the contracts, allowing them to mark member positions to market and collect margin effectively.

Read the full story on the report here.

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