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Mind the Gap: Undercollateralization in the Global and Canadian OTCD Markets
Abstract
We provide estimates of the collateral gap in the global and Canadian OTCD markets. Using the latest available data as of December 31 2011, it is estimated that current exposures after netting are $3.9T globally and $71B in Canada. The estimated amount of available collateral after correcting for re-hypothecation in each market is $767B and $48B, respectively. Thence, the current gap in variation margins stands at $3.1T globally and at $23B in Canada. The initial margin that would be required to centrally clear OTCD is estimated at $4T globally and $104B in Canada. The rate of collateralization has increased globally, but specially in Canada. In 2001, 92% of global and 72% of Canadian current exposures were undercollateralized; currently, the figures are 80% for global and 30% for Canadian current exposures. The high level of collateralization and the lack of re-hypothecation could make the Canadian market more resilient to systemic shocks. Further, it is likely that the upcoming regulatory reforms will have a more subtle impact on Canadian banks than on banks elsewhere.
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