The problem is when trades are not sufficiently standardised to be cleared centrally. This might appear a technical question. But it matters a lot for the world beyond finance. Trades potentially affected include currency swaps used by multinational companies borrowing across foreign exchange markets. Regulators are pushing for non-centrally cleared trades to be backed by high levels of collateral, such as cash or government bonds. This is where the $10 trillion figure comes in. It is the amount of extra collateral that could be required according to estimates by the International Swaps and Derivatives Association.
Admittedly the $10 trillion figure is based on fairly extreme assumptions about what exactly the rules would require. Still, even if lower, the volume of safe assets that would be sucked out of use by the financial system would be massive. While central banks were trying to stimulate economies using “quantitative easing”, the world’s regulators would be undermining their efforts with rules that, in effect, restrict credit supply and thus economic activity. The European parliament’s economic affairs committee voted to delay implementation of the new plans in Europe.
The idea behind macro-prudential regulation is that it can somehow make up for weaknesses in monetary policy, for instance by preventing dangerous asset price bubbles. In fact, as the debate over derivatives regulation illustrates, the problems at times of weak economic growth can sometimes be the opposite: regulatory policies can undermine the effectiveness of monetary policy.
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