GLOBAL - The role of central counterparties (CCPs) in clearing derivatives trades continues to grow at a time when both the US and Europe are set to implement new directives seeking to push over-the-counter (OTC) deals into central clearing houses, according to a new survey conducted by the International Swaps and Derivatives Association (ISDA).

In its 2012 Margin Survey, ISDA reveals that the 14 largest dealers - which were asked to indicate their levels of collateralisation with central counterparties - delivered as much as $50bn (€37.8bn) of collateral as margin in central counterparties.

Out of the $50bn, $49.6bn was delivered in the dealers' executing broker capacity and $0.7bn in their clearing member capacity, according to ISDA.

The survey also showed that market participants continue to expand their use of collateral to mitigate OTC derivatives credit exposures.

Among the dealers surveyed, 84% said all of their transactions were now executed with the support of a collateral agreement, up from 80% in 2011.

According to ISDA, 96% of all trades executed in the credit derivatives markets are now subject to collateral arrangements. 

Robert Pickel, ISDA chief executive, said: "As the survey clearly demonstrates, collateralisation remains among the most widely used methods to mitigate counterparty credit risk in the OTC derivatives market, and market participants have increased their reliance on collateralisation over the years. 

"In an evolving regulatory environment that seeks to reduce the counterparty risk associated with derivatives, the continued use of bilateral collateralisation has - in the same way as clearing - an important role to play in risk mitigation."

Under both the European Market Infrastructure Regulation (EMIR) Directive introduced by Brussels and the Dodd-Frank rules implemented in the US, market participants - including pension funds - will be required to centrally clear their OTC derivatives trades and post initial margins on top of variation margins to limit any potential residual counterparty credit risk.

However, the two regulations differ slightly.

While the initial EMIR text said the clearing obligation should not apply to pension schemes until central counterparties developed a "suitable technical solution" for the transfer of non-cash collateral for variation margin, under the US directive, pension funds and banks that enter into a non-centrally cleared trade will have to post additional margin.
This gap between the US and the EU regulations could nonetheless be filled with the introduction of new measures by Brussels.

In a joint consultation paper, the European Securities and Markets Authority, the European Insurance and Occupational Pensions Authority and the European Banking Authority announced that they were considering a requirement to "exchange, post or collect" initial margins for bilateral over-the-counter derivative trades on top of the current variation margins generally used for such trades, requiring market participants to comply with the same conditions for bilateral trades as for centrally cleared deals.