An International Swaps and Derivatives Association (ISDA) survey has found 90% of non-cleared OTC derivatives trades were subject to collateral agreements at the end of 2013, though collateral availability is decreasing.
ISDA, which held its annual general meeting in Munich this week, has released the results as part of its 2014 Margin Survey.
The study found the estimated amount of collateral in the non-cleared OTC derivatives market has decreased 14% from US$3.7 trillion at the end of 2012 to about US$3.17 trillion by 31 December 2013 due to the need for mandatory central clearing.
New rules in the US and Europe under the Dodd-Frank Act and the European market infrastructure regulation mandate OTC derivatives trades to be centrally cleared and reported to a trade repository.
“Collateralisation has a fundamentally important role to play in risk mitigation,” said Robert Pickel, ISDA CEO. “Over the past 14 years, ISDA’s Margin Survey has provided a consistent set of benchmarks for collateral use and is part of a broader set of the Association’s initiatives in the area of collateral, including documentation, best practices and practitioner guidelines.”
The survey also found, as in the past, the majority of portfolios that make derivatives transactions perform less than 100 trades and 87% of non-cleared OTC derivatives collateral agreements relate to those portfolios.
Portfolio reconciliation is also being widely used and considered a best market practice, according to the survey. Larger-sized portfolios show a 5% increase in daily reconciliation at the end of 2013 compared to 2012.
Dodd-Frank and the EMIR rules involving frequent portfolio reconciliation are expected to continue driving this trend, according to ISDA.
Of the 61 firms responding to the 2014 ISDA Margin Survey, 87% were banks and broker dealers. The remaining participants consisted of asset managers, hedge funds, insurance companies and others.
In another recent ISDA survey, the association found nine out of 10 OTC derivatives users believe the instruments are important to risk management strategies.