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 – all things being equal – would 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