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Swap Clearing to Add $480 Billion of Margin, Morgan Stanley Says

Banks and money managers will need to post $480 billion in new collateral to back swaps processed by clearinghouses under the Dodd-Frank Act, according to a Morgan Stanley analysis.

The firms would need to post as much as $1.3 trillion and as little as $20 billion of so-called initial margin, analysts led by Tiffany Wilding wrote in a note to clients today. The demands will be mitigated by “unencumbered collateral” already at the firms, the fact that only new trades need to be cleared and that a range of assets from sovereign debt to corporate bonds can be used, they wrote.

Dodd-Frank requires most interest-rate, credit-default and other swaps to be processed by clearinghouses in an effort to cut counterparty risk after the $648 trillion privately negotiated market complicated efforts to resolve the financial crisis in 2008. Initial margin hasn’t always been required on swaps trades outside clearinghouses.

Clearinghouses collect daily margin, monitor gains and losses and allow regulators to see prices and positions in the market. The mandatory clearing is expected to begin for dealers in the first quarter 2013.

The new regulations also require swaps that can’t be processed by a clearinghouse to be backed by collateral.

“We estimate this market is approximately $170 trillion in size, which implies significantly greater potential incremental” margin growth, the analysts wrote. They said they would estimate the amount needed to back non-cleared swaps in a future report.

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