A new report from the Office of Financial Research of the US Department of Treasury reviews and compares the costs to banks of bilateral uncleared derivatives with centrally cleared derivatives, and concludes that bilateral will be less expensive in most cases. The advantage of bilateral derivatives is far greater in the context of corporate end-users who qualify the the End User Clearing Exception under Dodd Frank, and thereby avoid mandatory margin requirements. While its interesting to see this research coming out of a quasi-governmental entity, their conclusion isn't surprising.
The cost of trading bilateral derivatives could be less than its central cleared equivalent...new research has found. [A] study by the Office of Financial Research (OFE) has found that there may not be cost incentives to using the new system which counteracts global regulatory initiatives for the reduction of systemic risk. The revelation could come as a blow to global regulators who have spent years writing and implementing central clearing regulations to reduce systemic risk. The paper ‘Does OTC Derivatives Reform Incentivize Central Clearing?’ concludes that these cost comparisons are significant factor in banks’ decisions whether to use central clearing or not. Despite the hike in cost of bilateral, the paper still says that bilateral trading may carry lower capital and collateral costs.