Working Paper: NBER ID: w17558
Authors: Viral V. Acharya
Abstract: 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.
Keywords: No keywords provided
JEL Codes: G01; G13; G18; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| derivatives exposures (G19) | systemic risk (E44) |
| inadequate reporting standards (L15) | opacity of derivatives positions (G13) |
| opacity of derivatives positions (G13) | insufficient regulatory oversight (G18) |
| insufficient regulatory oversight (G18) | exacerbation of systemic risk (F65) |
| lack of adequate understanding of derivatives exposures (F65) | compromised regulatory ability (L51) |
| compromised regulatory ability (L51) | large-scale bailouts (H81) |
| current reporting standards (G38) | inadequate assessment of systemic risk contributions (F65) |
| improved transparency (G38) | better risk management (G11) |
| margin coverage ratio (MCR) (E51) | dealer's ability to manage collateral (G33) |
| lack of transparency standards (G38) | underreported counterparty risk (G33) |
| underreported counterparty risk (G33) | potential systemic failures (P11) |