Maybe it was attending the FIA Expo NY yesterday or hearing a number of buy-side firms complain about having to post initial margin for their cleared OTC trades, which still sounds like an oxymoron to me, but I’ve wondered who really benefits from these cleared trades.
To clear these trades through a central counter party, investors will need to post “quality” collateral (read: dollars and Treasuries) to the various industry clearinghouses, where it will sit unavailable as potential liquidity.
I doubt that most buy-side firms have enough quality liquid assets to meet the new margin requirements. So, they’ll go to the market and drive up their demand and create a liquidity crunch as demand outstrips supply.
What make me think this will happen?
The industry clearinghouses are working with the markets to forestall the liquidity crunch by accepting other types of collateral. Investors can use precious metals and sovereign debt and currencies from smaller economies as collateral.
What is really telling is that they are also accepting certain corporate bonds as collateral, although with steep haircuts.
This is good news for US Treasury since it creates an artificial demand for US debt and have investors sit on those holdings. It’s good timing considering that regular large-scale buyers of US debt seem to have reach their fill.
But what will the impact be for the systemic well-being of the global markets? It’s never a good sign when a supplier needs to force demand for their product through arbitrary requirements and not on the product’s own merits.