A Transparency Standard for Derivatives
Chapter in NBER book Risk Topography: Systemic Risk and Macro Modeling (2014), Markus K. Brunnermeier and Arvind Krishnamurthy, editors (p. 83 - 95)
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.
This paper was revised on February 3, 2012A Transparency Standard for Derivatives, Viral V. Acharya
Users who downloaded this chapter also downloaded these: