By Andrew Cross and Tom Watterson

Last week ISDA announced that, in the event of a default by the U.S. on its debt following the failure to raise the debt ceiling, the sellers of CDS on U.S. debt would pay-out, at most, only $3.6 billion.

The potential default, however, is also impacting the interest rate swap market. Anticipating market moves related to the debt ceiling and a related increased tail risk, the CME increased the margin on cleared interest rate swaps. The increase will be 12% across interest rate swap portfolios and the CME will implement the increase across four days beginning at the close of business today.  Note the paradox: given the prominent use of Treasuries as collateral, a default on U.S. debt Рall things being equal Рwould seem to increase the demand for U.S. debt. Ha!

The CME notice of the margin increase can be found here.

News articles on the margin hike can be found:

  • by Phillip Stafford at the Financial Times here

Good day. Good-ness. TSR