Emerging from behind the smokescreen of “sovereigns have no risk,” the OECD is promoting the idea that governments and government agencies should debate posting collateral for their OTC derivatives like everybody else. The fact that sovereigns have not posted collateral previously is a major concern in financial markets, and also speaks to some irony as governments have been the main promoters of the idea that everyone else has to post collateral. According to some accounts, the value of these uncollateralized swaps on bank balance sheets is in the tens of trillions of dollars.
From the report:
Many OECD sovereigns use OTCD in their debt management activities (mainly interest rate swaps and cross-currency swaps). Some of the regulatory initiatives for OTCD markets may lead to changes in sovereign and dealer practices. Potential changes include modifications to collateralization requirements, the use of central clearing for OTCD trades, and increased pre- and post-trade reporting. Issues around sovereign exemptions and the transition of existing OTCD portfolios may also require attention from sovereign debt managers.
Moreover, as sovereigns develop their debt and asset management policies, they may also need to account for the broader public policy implications of their decisions. To maintain well-functioning domestic capital markets and help ensure effective implementation of the regulatory changes, sovereigns may also need to consider adjusting their funding strategies.
The full report is here.
A related article from Risk Magazine is here.