A Transparency Standard for Derivatives

Viral V. Acharya

This chapter is a preliminary draft unless otherwise noted. It may not have been subjected to the formal review process of the NBER. This page will be updated as the chapter is revised.

Chapter in forthcoming NBER book Risk Topography: Systemic Risk and Macro Modeling, Markus K. Brunnermeier and Arvind Krishnamurthy, editors
Conference held April 28, 2011
Forthcoming from University of Chicago Press

Derivatives exposures across large financial institutions often contribute to – if not necessarily create – systemic risk. Current reporting standards for derivatives exposures are nevertheless inadequate for assessing these systemic risk contributions. In this paper, I explain how a transparency standard, in contrast to the current standard, would facilitate such risk analysis. I also demonstrate that such a standard is implementable by providing examples of existing disclosures from large dealer firms in their quarterly filings. These disclosures often contain useful firm-level data on derivatives, but due to a lack of standardization, they cannot be aggregated to assess the risk to the system. I highlight the important contribution that reporting the “margin coverage ratio” (MCR), namely the ratio of a derivatives dealer’s cash (or liquidity, more broadly) to its contingent collateral or margin calls in case of a significant downgrade of its credit quality, could make toward assessing systemic risk contributions.

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This paper was revised on February 3, 2012

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This chapter first appeared as NBER working paper w17558, A Transparency Standard for Derivatives, Viral V. Acharya
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