83,357
edits
Amwelladmin (talk | contribs) No edit summary Tags: Mobile edit Mobile web edit |
Amwelladmin (talk | contribs) No edit summary Tags: Mobile edit Mobile web edit |
||
Line 19: | Line 19: | ||
{{archegos capsule}} | {{archegos capsule}} | ||
===The curious regulation of [[variation margin]]=== | ===The curious regulation of [[variation margin]]=== | ||
Now here is an interesting thing: instead of buying the stocks outright, [[Archegos]] put on its positions using a product called “[[synthetic prime brokerage]]”. Being based on [[Equity derivatives|equity swaps]], [[synthetic prime brokerage]] is caught by [[Regulatory margin|uncleared margin regulations]]. This meant Archegos’ prime brokers were ''obliged'' to pay out realised gains<ref>For [[prime broker]] | Now here is an interesting thing: instead of buying the stocks outright, [[Archegos]] put on its positions using a product called “[[synthetic prime brokerage]]”. Being based on [[Equity derivatives|equity swaps]], [[synthetic prime brokerage]] is caught by [[Regulatory margin|uncleared margin regulations]]. This meant Archegos’ prime brokers were ''obliged'' to pay out ''un''realised gains<ref>For [[prime broker]]s charging “[[dynamic margin]]” this was partly offset by the effect of increased [[initial margin]] required on the inflated value of the position in question; for those charging only a [[static margin]] amount, there was not even that fig-leaf. </ref> or “[[net equity]]” to [[Archegos]], every day, in [[cash]], in the form of “regulatory [[variation margin]]”. To be sure, prime brokers could impose thresholds by way of [[initial margin]] — oh, that’s another story altogether — but over those thresholds, [[variation margin]] is — at least till the next margin call —the client’s money. It is entitled to withdraw it upon request. | ||
Now this is all completely normal in the world of latter-day [[Derivative|derivatives]]: regulators mandated [[variation margin]] into pretty much every major market on the planet following the [[global financial crisis]] ''in the name of reducing systemic risk'' — but all the same, in the context of [[Archegos]], it made a bad situation worse. It ''forced'' [[swap dealer]] | Now this is all completely normal in the world of latter-day [[Derivative|derivatives]]: regulators mandated [[variation margin]] into pretty much every major market on the planet following the [[global financial crisis]] ''in the name of reducing systemic risk'' — but all the same, in the context of [[Archegos]], it made a bad situation worse. It ''forced'' [[swap dealer]]s to lend to their client against appreciating assets that were increasingly likely to then ''de''preciate again. | ||
Imagine if your bank, by law, had to pay you out the cash value of any increase in your home’s value during the term of your mortgage. Nuts, right? | Imagine if your bank, by law, had to pay you out the cash value of any increase in your home’s value during the term of your mortgage. Nuts, right? | ||
Now had Archegos bought real shares using [[margin loan]]s from its [[prime broker]] | Now had Archegos bought real shares using [[margin loan]]s from its [[prime broker]]s, they would ''not'' have ''had'' to pay out the cash value any asset appreciation. To be sure, they may well have ''willingly'' done so – margin lending is how [[prime broker]]s make their money, after all — but being ''able'' to lend money, and having to lend it money are quite different propositions, especially on the day the whole world is going to hell.<ref>It is fair to note that — with the possible exception of the vampire squid — [[Archegos]]’s brokers did ''not'' believe the world was going to hell, at least not until it was far too late. But the principle remains.</ref> | ||
=== A dissonance === | === A dissonance === |