Uncovered counterparty exposures in global OTC derivatives markets

BIS Quarterly Review  |  June 2012  | 
04 June 2012

(Extract from page 23 of BIS Quarterly Review, June 2012)

Uncovered credit exposures between counterparties to bilateral trades in the over-the-counter (OTC) derivatives market were at least $2.1 trillion at end-2011 (Graph A2). While this is lower than the estimated $3.0 trillion at the end of 2008, just after the peak of the financial crisis, the volume of uncovered positions appears to have increased in both 2010 and 2011.

We estimate the uncovered credit exposures by subtracting the volume of collateral posted in the OTC derivatives market from the counterparty credit exposures as indicated by the BIS Semiannual Survey. Counterparty credit exposures, in turn, refer to the sum of all positive market values of bilateral positions between market participants after netting offsetting trades covered by netting agreements. These "gross credit exposures" increased from $3.5 trillion to $3.9 trillion during 2011. They were $5.0 trillion at the end of 2008.

Collateral posted against counterparty credit exposures was no more than $1.8 trillion at end-2011, $1.5 trillion at end-2010 and $2.0 trillion at end-2008. We derive these estimates from the amount of "collateral in circulation" reported in the 2012 Margin Survey of the International Swaps and Derivatives Association (ISDA), which was $3.6 trillion at the end of 2011. However, we adjust this figure to account for the fact that it counts each unit of outstanding collateral at least twice: it is the sum of collateral posted and received by market participants (see Appendix 2 of the ISDA survey), and it counts the same unit of collateral multiple times if counterparties post it against different credit exposures. The result of the multiple counting is an overstatement of the counterparty exposures effectively backed by collateral.