A Transparency Standard for Derivatives

Viral V. Acharya ()

No 17558, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G01 G13 G18 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec and nep-rmg
Date: 2011-11
Note: AP CF
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Published as Viral V. Acharya. "A Transparency Standard for Derivatives," in Markus K. Brunnermeier and Arvind Krishnamurthy, editors, "Risk Topography: Systemic Risk and Macro Modeling" University of Chicago Press (2013)

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Chapter: A Transparency Standard for Derivatives (2012)
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