New margin rules for OTC market will cost $1.4 trillion, TABB report says

11 October 2011

New regulation will cost participants in the over-the-counter (OTC) derivatives market an extra $1.4 trillion over the next five years, a new report has said.

The Initial Margins for OTC Derivatives: The Burden of Opportunity Study by the TABB Group showed that additional funds will need to be set aside to meet the demands of legislatory amendments to move OTCs to a central clearing facility.

In a statement, TABB said it expects the changes, which are part of the Dodd-Frank act, to not only damage market liquidity but also impact which OTC trade infrastructures remain in place.

E Paul Rowaday Jr, author of the report and senior analyst at TABB, said: “Initial margin levels for even the most vanilla trades will continue to be a huge drag on capital, given that they’re starting from zero today.

“Even small margin requirements attached to huge notional values outstanding have the potential to wreak havoc on product selection.”

Previous research by the TABB Group said that regulators implementing changes to the way OTC derivatives are cleared have instigated a “technology revolution”.

By Jim Ottewill

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