A number of derivatives dealers are assembling counterparty risk securitizations that could bear on the price corporates pay for bespoke deals. Dealers have warned corporates that despite their exemption from clearing, they will still face skyrocketing costs for OTC products because the dealers will have to set aside regulatory capital under new rules.
However, the dealers’ securitizations of credit valuation adjustments (CVAs), that is, counterparty credit risk, could allow them to avoid the big capital charges demanded by Dodd-Frank and similar rules in other jurisdictions. The initial deals are for risk from financial counterparties, but if the transactions get off the ground, other types of risk, such as corporate credit, could be included.
Unfortunately, these transactions are not easy to do. Societe Generale is currently working on one, according to International Financing Review, and RBS, UBS and Credit Suisse have all taken a crack at them over the last few years.
The trouble is, regulators won’t allow dealers to tranche the securitizations, so they can’t just buy protection on the first-loss tranche. They have to buy protection on the whole portfolio, and entities with an appetite for that amount of credit exposure are currently few and far between. IFR reports that BlueMountain Capital and Renshaw Bay are developing the infrastructure to invest in these types of transactions. How many others will step forward is unclear; the credit analysis skills necessary to vet a portfolio of CVAs are not easy to find.
With the International Swaps and Derivatives Association anticipating that 20 percent of all OTC derivatives are un-clearable, finding a solution to the cost issue is a pressing concern for corporate hedgers. CVA securitizations could help, but only if they become easier to structure, and only if dealers pass their savings on to their clients.