Regulatory initial margin: Difference between revisions
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{{g}}[[Regulatory margin]] for [[initial margin]] (known to [[ISDA ninja]]s as an “{{csaprov|Independent Amount}}”, as opposed to [[regulatory variation margin]]. Introduced later and with a lot more complexity, because — | {{g}}[[Regulatory margin]] for [[initial margin]] (known to [[ISDA ninja]]s as an “{{csaprov|Independent Amount}}”, as opposed to [[regulatory variation margin]]. Introduced later and with a lot more complexity, because — to properly address [[credit risk]]s between the parties and not aggravate them — [[regulatory initial margin]] can’t be [[Title-transfer collateral arrangement|transferred outright]]. That means, no [[title transfer]] of [[securities]], and no [[cash]]. | ||
===You what?=== | ===You what?=== | ||
It is true, my little striplings. In the old world, {{csaprov|Independent Amount}}s were transferred outright to the Transferee, by title transfer.<ref>Under an [[English law]] {{csa}}, at any rate. But the effect was the same where [[rehypothecation]] was allowed under a {{1994csa}} too.</ref> This created a conceptual issue for regulators, who were trying to ''minimise'' credit exposure between the parties: a [[title transfer]] of [[collateral]] to cover a potential {{vmcsaprov|Exposure}} that doesn’t yet — and might never — exist creates a ''negative'' exposure, because the holder of the {{csaprov|Independent Amount}} would ''owe'' it to the {{csaprov|Transferor}}, and the Transferor would be an unsecured creditor for its return. Hence, [[regulatory initial margin]] cannot be [[cash]], and must be [[Pledge|pledged]] and not [[title transfer]]red. | It is true, my little striplings. [[Securities]] only, and only by [[pledge]].<ref>Under certain thresholds, you can post non-regulatory compliant [[initial margin]]<ref>For more information see [[Credit Support Amount (VM/IA)]].</ref>, but this is somewhat frowned upon, subject to regulatory limits and so on. | ||
In the old world, {{csaprov|Independent Amount}}s were transferred outright to the Transferee, by title transfer.<ref>Under an [[English law]] {{csa}}, at any rate. But the effect was the same where [[rehypothecation]] was allowed under a {{1994csa}} too.</ref> This created a conceptual issue for regulators, who were trying to ''minimise'' credit exposure between the parties: a [[title transfer]] of [[collateral]] to cover a potential {{vmcsaprov|Exposure}} that doesn’t yet — and might never — exist creates a ''negative'' exposure, because the holder of the {{csaprov|Independent Amount}} would ''owe'' it to the {{csaprov|Transferor}}, and the Transferor would be an unsecured creditor for its return. Hence, [[regulatory initial margin]] cannot be [[cash]], and must be [[Pledge|pledged]] and not [[title transfer]]red. | |||
This means, for most cases, third-party custodians, triparty arrangements, account control agreements, security deeds and all that kind of nonsense. Corporate trust and agency service providers sang hosannas to the regulators. [[Legasl eagle]]s licked lips. Everyone else did the side-eye. | This means, for most cases, third-party custodians, triparty arrangements, account control agreements, security deeds and all that kind of nonsense. Corporate trust and agency service providers sang hosannas to the regulators. [[Legasl eagle]]s licked lips. Everyone else did the side-eye. |