Disputing a Margin Call on OTC Derivatives
Paul, Thank you for pointing out the differences in calculating initial margin for cleared vs. non-cleared OTC derivatives, which certainly is a complex topic. I've seen various headlines speculating on the safety of CCP model, asking what if a counterparty defaults. From what you said, I gather that if a counterparty disputes an initial margin call, this will hold up payment to the CCP. Can this be risky to the entire CCP and its other participants?
In your second example, with non-cleared OTC derivatives, these instruments are too illliquid to be placed in a CCP. So it seems like the bank's balance sheets are still at risk. And with the non-cleared OTC derivatives, it seems that the banks themselves are calculating initial margin based on models standardized by ISDA, but there are still differences in calculations. Do you think enough risk has been taken out of the system?