Salient to Investors:

In March 2013, up to 79 percent of swaps must be backed by collateral and go through clearinghouses.

Lloyd Blankfein at Goldman Sachs said clearinghouses could be the world’s biggest systemic threat. Supurna VedBrat at BlackRock said they are the new too-big-to-fail.

JPMorgan is the biggest swaps dealer in the US with $72 trillion in derivative assets, followed by Bank of America with $64 trillion and Citigroup with $55 trillion.

Running commodity exchanges and clearing trades can be hugely profitable, with profit margins at CME Group topping 50 percent.

Satyajit Das says the need for a Fed rescue isn’t out of the question as the collateral put up by traders and default fund sizes are calculated using data that might not hold up.

The collateral or margin is typically based on “value-at-risk,” and is calculated to cover losses with a 99 percent level of confidence – meaning the biggest losses might not be fully covered – like JP Morgan’s London Whale loss.

Craig Pirrong at the University of Houston said clearinghouses have been oversold as a way of preventing Armageddon – a clearinghouse is highly unlikely to collapse but there is a possibility that taxpayers could be at risk. Pirrong said clearinghouses may fall into a similar trap in their margin levels – margins that appear prudent in normal times may become severely insufficient during periods of market stress.

Morgan Stanley estimates as much as $927 billion in new collateral will be needed.

Randall Costa at Citadel said clearing is way safer than private transactions – banks go down every year, while clearinghouses have almost never gone down.

As the new law was translated into practice, some industry standards were relaxed by regulators. The CFTC in November 2011 published a 146-page report on how the new derivatives clearinghouses would operate, detailing compromises among the agency, banks, money managers, insurance companies and the clearinghouses themselves.

The CFTC doesn’t have the resources or technology to keep track of the swaps market, which is 8 times larger than the futures market.

Darrell Duffie at Stanford University said no major clearinghouse provides sufficient detail on their default-management plans.

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