Reaping Rewards From Portfolio Margining

Rate Swap Margin Requirements Poised to Drop Sharply

Amid approaching mandatory clearing rules for over-the-counter derivatives, initial margin requirements for interest rate swaps are poised to drop by at least 32% when portfolio margining becomes available to all market participants, according to Adam Sussman, director of research with TABB Group, LLC.

For CME Group interest rate contracts, the benefits may be even greater. Based on a TABB Group analysis of over 200 CME Group inter-contract spreads, margin requirements could fall by 65% to as much as 90%, with products of similar maturities, such as Eurodollars and certain Treasury futures, awarded higher offsets.

"Margin offsets, primarily through OTC swaps and futures contracts, dramatically reduce margin requirements," Sussman wrote in a recent report. "Simply put, portfolio margining allows firms with offsetting risks to also offset their margin."

Industrywide, portfolio margining for interest rate swaps may save at least $618 billion, Sussman estimated. "Portfolio margining, or the lack thereof, will therefore play a significant role in the future of the OTC market," he said.

On December 3, CME Group will launch Deliverable Interest Rate Swap Futures, the first futures contract that allows for delivery of a CME-cleared OTC interest rate swap. The new contracts allow swap exposure while achieving maximum margin benefits.

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