Analysis: Pssst, looking to trade a swap without margin?

By Jonathan Leff and Christopher Doering

NEW YORK/WASHINGTON | Thu Apr 14, 2011 1:09am EDT

NEW YORK/WASHINGTON (Reuters) — Hey buddy, looking for a bespoke hedge on oil prices or forex rates, without paying millions in margin to your bank? I may be able to help…

If new rules proposed this week stand as written, that may be the pitch from major hedge funds like Citadel or big commodity firms such as BP (BP.L) who have long offered similar hedging services as the Wall Street banks, but struggled to grow their business in an increasingly crowded market.

That outlook could change after the Federal Deposit Insurance Corp said on Tuesday that banks would be required to collect collateral from customers who don’t meet certain credit criteria if they want to sell uncleared swaps.

A separate proposal from the Commodity Futures Trading Commission — which applies to swap market players who aren’t banks — stipulates end-users are not required to set aside margin at all, regardless of whom they trade with.

As a result of that discrepancy, companies with a lower credit rating looking to trade customized, nonstandard swaps may have a choice: trade with their usual bank and pay the requisite margin; or find a new counterparty with a tolerance for credit risk who won’t be required to collect collateral.

Continue reading here.


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