Policy makers and market participants alike wish to understand the amount, economic significance, and concentration of derivatives trading activity. This paper suggests that systematic measuring and reporting of margin by market participants, disaggregated by asset class, would provide more meaningful insights into derivatives activity. Where margin is not required, it could nevertheless be imputed and reported. The Dodd-Frank financial reform bill, by contrast, moves away from transparency by granting non-financial firms an end-user exemption from posting initial margin on their trades. This is economically equivalent to a borrowing from the counterparty and effectively permits these firms to issue off-balance-sheet debt.
Prepared for the NBER Initiative on Systemic Risk and MacroModeling. I am grateful to Markus Brunnermeier, Arvind Krishnamurthy, Richard Heckinger, John McPartland, and Robert Steigerwald for helpful discussions and comments, but of course errors are my own. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Robert L. McDonald
I am a director of Eris, a futures exchange.