ISDA Margin Survey 2013

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17 Table 4.1 shows that for “clean” CSAs (where eligible collateral is cash only in a single currency or in multiple currencies that are aligned to the underlying swap cashflows, such as a single-currency CSA, a siloed CSA, or a Standard CSA) over 80% of market participants responding would theoretically value swaps at OIS where rehypothecation is permitted. This demonstrates the degree to which there is strong market consensus on OIS valuation for this special case set of circumstances, which has been built up over the past two to three years. It is notable that “clean” CSAs of the types mentioned above generate swap valuations that approach the clearing house valuation of similar products, and in fact the Standard CSA produces valuations that are exactly equivalent to LCH swap valuation; this convergence in valuation approach across cleared and non-cleared segments of the market is not coincidental. In terms of the historically most common valuation basis of LIBOR, only 5-10% of firms would theoretically still use this basis in all of the scenarios captured by the survey. For other collateralization scenarios, the consensus is less strong. For instance, in situations where collateral is not rehypothecable, a fairly consistent response rate of about 15-17% suggest that they would theoretically value swaps based on their own cost of funds, which would align the discount rate to the rate at which the future cashflows will be funded but only where collateral is received; a further 16-20% would theoretically use the more nuanced approach of discounting at OIS for payables and cost of funds for receivables. Thus, around 31-37% of firms would theoretically use a funding sensitive discount rate for CSAs containing nonrehypothecable collateral, whereas by contrast between 32% and 50% of firms would theoretically discount at OIS in this situation. In non-clean CSA scenarios where rehypothecation is permitted, but the eligible collateral is not currencyaligned or includes securities, we see other contrasts. Some 25-35% of firms would theoretically use a discount curve constructed from the cheapest-to-deliver collateral currency at each point, option adjusted, which is a sophisticated treatment of a highly complex collateralization scenario. However, 36-50% would theoretically simply discount at OIS regardless of what collateral may be delivered by their counterparty, indicating that there is still substantial work to be done across the market to achieve consistent valuation of complex CSA structures, or to replace these CSAs with “clean” structures such as the Standard CSA that would produce straightforward OIS valuations. For CSAs containing securities as collateral (whether government bonds, agencies or corporate bonds), around 22-23% of firms would theoretically discount based on either OIS or LIBOR plus the repo funding spread for the instrument. In practice these instruments fund at a wide range of spreads in repo markets, but with a markedly different (lower) risk profile than the same securities posted under CSAs, where (unlike a repo) the posting may be at any future point in time, and for unlimited amount and unlimited duration, and with no ability for the receiving party to decline or break the posting. While it must be remembered that table 4.1 contains the theoretical responses of firms, it is perhaps useful as a gauge of the direction of swap valuation under different CSA conditions in the future. ISDA Margin Survey 2013 June 2013
Table 4.1: Valuation of derivatives subject to collateral agreements Percentage of respondents that indicate the corresponding benchmark to be conceptually the most relevant valuation basis for each scenario Type of CSA Scenario Cash Only CSA – Single Currency or Multiple Aligned Currencies (e.g. single-currency CSA, siloed CSA, Standard CSA or LCH-style CSA) with interest at the relevant OIS rate Cash Only CSA – Multiple Currencies Non-Aligned (e.g. traditional CSA with multiple currencies of eligible cash collateral but no securities eligible as collateral) with interest on cash at the relevant OIS rate CSA including cash (OIS interest rate) and government bonds CSA including cash (OIS interest rate) and agency bonds CSA including cash (OIS interest rate) and investment grade corporate bonds Rehypothecation Status Firm’s own cost of funds Asymmetric – OIS on payable, firm’s cost of funds on receivable Most Relevant Valuation and Discounting Basis Discount curve constructed from cheapest-to-deliver collateral currency at each point, option adjusted. LIBOR LIBOR + repo funding spread Permitted 6.6% 3.3% 4.9% 4.9% N/A 80.3% N/A Not permitted or operationally impractical OIS 18 OIS + repo funding spread 17.2% 19.0% 5.2% 8.6% N/A 50.0% N/A Permitted 5.1% 0.0% 35.6% 8.5% N/A 50.8% N/A Not permitted or operationally impractical 16.4% 16.4% 12.7% 10.9% N/A 43.6% N/A Permitted 3.4% 1.7% 25.9% 8.6% 1.7% Not permitted or operationally impractical 14.0% 19.3% 8.8% 10.5% 3.5% Permitted 7.3% 1.8% 27.3% 5.5% 1.8% Not permitted or operationally impractical 16.7% 20.4% 9.3% 9.3% 1.9% Permitted 5.5% 3.6% 27.3% 5.5% 3.6% Not permitted or operationally impractical 15.1% 20.8% 9.4% 9.4% 1.9% 37.9% 20.7% 36.8% 7.0% 36.4% 20.0% 33.3% 9.3% 36.4% 18.2% 32.1% 11.3% ISDA Margin Survey 2013 June 2013
Page 1 and 2: ISDA Margin Survey 2013 June 2013 I
Page 3 and 4: SUMMARY 2 1. Collateral in circulat
Page 5 and 6: 1.2. ABOUT THE SURVEY RESPONDENTS 4
Page 7 and 8: 2. COLLATERAL ASSETS 6 2.1. ESTIMAT
Page 9 and 10: Chart 2.2: Gross Credit Exposure of
Page 11 and 12: 10 re-use collateral, and what perc
Page 13 and 14: 3. EXTENT OF COLLATERAL USE 12 3.1.
Page 15 and 16: Table 3.2: Percentage of collateral
Page 17: 4. MARKET PRACTICES 16 4.1 SWAP VAL
Page 21 and 22: 20 dependent thresholds, but intere
Page 23 and 24: 22 5. ELECTRONIC MESSAGING The incr
Page 25 and 26: 24 Table 6.1: Reconciliation freque
Page 27 and 28: 26 Table 7.1b: Collateral Outstandi
Page 29 and 30: 28 Table 7.3: Value of collateral r
Page 31: 30 Appendix 2: Adjustment to report

ISDA Margin Survey 2013

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