Analysis in Margin Call

Initial margin for Interest Rate swaps

CME Group Inc. (CME), which planned to increase margin levels by 12 percent for the interest-rate swaps that its clearinghouse guarantees, reversed the decision after lawmakers reached an agreement avoiding a U.S. default.

The owner of the world’s largest futures market had announced the higher collateral requirement this week, citing the risk that negotiations over avoiding a U.S. government default would spur volatility. CME Group, based in Chicago, planned to implement the change over four days, beginning with a 3 percent increase yesterday. The figure will revert to the normal level as of today, CME Group said on its website.

Congress agreed yesterday to raise the U.S. borrowing limit and end a partial government shutdown. The 12 percent margin increase could have amounted to $1.5 billion to $2 billion in additional margin before the effect of netted positions is accounted for, Niamh Alexander, an analyst with KBW Inc. in New York, wrote in a note to clients yesterday.

CME Group’s clearinghouse guarantees futures and swaps contracts based on interest rates, Treasuries, gold, oil, the creditworthiness of companies, and currencies. Clearinghouses require margin as protection against losses should traders default on their obligations.

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Popular Q&A

avatar
What is an interest rate swap?

In interest rate swaps, each party agrees to pay either a fixed or a floating rate in a particular currency to the other party. The fixed or floating rate is multiplied with the Notional Principal Amount (NPA). This notional amount is not exchanged between the parties involved in the swap. This NPA is used only to calculate the interest flow between the two parties.
The most common interest rate swap is where one party 'A' pays a fixed rate to the other party 'B' while receiving a floating rate which is pegged to a reference rate like LIBOR.

avatar
What is interest rate swaps?

In interest rate swaps, each party agrees to pay either a fixed or a floating rate in a particular currency to the other party. The fixed or floating rate is multiplied with the Notional Principal Amount (NPA). This notional amount is not exchanged between the parties involved in the swap. This NPA is used only to calculate the interest flow between the two parties.
The most common interest rate swap is where one party 'A' pays a fixed rate to the other party 'B' while receiving a floating rate which is pegged to a reference rate like LIBOR.

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