Thursday, October 20, 2011

Canada's Derivatives Risk

This used to be a bank.
Tim Lane, Deputy Governor of the Bank of Canada, let slip the bank's estimate of Canada's over-the-counter (OTC) derivatives risk recently while discussing the concept of a clearing-house for these otherwise invisible instruments, to wit, he emphasized that “sufficiently robust” central counterparties (CCPs) for the Canadian OTC derivatives market would strengthen Canada’s financial system and reduce the counterparty credit exposures of major participants. The question now for Canada, Lane wondered, is whether to go domestic or international. Canada held up well following the financial crisis of 2008-09, but Lane noted that Canadians must be mindful of the country’s C$9 trillion OTC derivatives market. “OTC derivatives, especially interest rate swaps are closely connected via arbitrage and financing relationships with other markets in Canada, including other derivative, bond and money markets,” he said. “So that’s big enough and connected enough that any disruptions would likely result in significant reverberations through our markets ... It is essential to ensure that we do not unduly further concentrate risk in a relatively small number of institutions that are direct clearing members of global CCPs,” Lane said. “These were the very institutions that spread and amplified contagion through the global financial system in 2008.” 

The Good News:  Only C$9 Trillion in OTC derivatives, plus "other derivatives".  I feel better already!