Clearinghouse Activity Shows Counterparty Risk Is Creeping Up Again

MF Global is the largest Futures Commission Merchant (FCM) that is not owned by a swaps dealer. So they have an extremely good vantage point to make the following claims:

The turmoil in the over-the-counter derivatives market – widely blamed for exacerbating the financial crisis – is prompting customers to look for alternatives to the banks that traditionally deal the contracts, according to Bernard Dan, chief executive of MF Global, one of the world’s biggest financial derivatives brokerages.

In an interview with the Financial Times, Mr Dan said MF had opened more than 300 new institutional accounts in the three months to the end of September in the US and Europe, with OTC transactions accounting for 43 per cent of the company’s total revenues, up from 31 per cent in the same period last year.

Mr Dan said customers were telling him they were concerned at the continued risks on the books of the biggest banks, such as difficult-to-value “level 3” assets. He said cheap financing from the Federal Reserve for US banks was aggravating the problem.

“Our new accounts come on the heels of this dislocation in the banking sector, with clients seeking a compelling non-bank alternative,” he said. “We’re beginning to see clients saying: ‘I don’t want to be with the nine big banks because of those level 3 assets and all that greater risk they’re taking.’ So we’re reaping the benefits in spite of the bigger headwinds in the industry.”

MF Global says OTC customers abandoning banks Hal Weitzman, Financial Times, November 5, 2009

If you are a corporation or an asset manager and you are not worried about the creditworthiness of your counterparty – you should be! The fact that your peers are worried enough to migrate the clearing of their OTC derivatives onto exchange clearinghouses ought to be a wake up call.

Comments

[Jasper M:]

Words to the wise - heed them.

Nov 15 04:20 AM