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{{a|g|{{Types of margin}}}}Also known, to ISDAphiles, [[ISDA ninja|ninjas]] and the men and women of {{icds}} as “{{csaprov|Independent Amount}}” and to aggressive predictive text engines as “''I’m''”, this is the amount of collateral or [[margin]] a [[counterparty]] requires up front, notwithstanding any change in the [[mark-to-market]] value of the transaction.
{{a|g|{{Types of margin}}}}Also known, to ISDAphiles, [[ISDA ninja|ninjas]] and the men and women of {{icds}} as “{{csaprov|Independent Amount}}” and to aggressive predictive text engines as “''I’m''”, this is the amount of collateral or [[margin]] a [[counterparty]] requires up front, notwithstanding any change in the [[mark-to-market]] value of the transaction.


Compare, by way of contrast, [[variation margin]].
So [[initial margin]] is a defence against ''potential future [[indebtedness]]'', should it happen, not ''current'' [[indebtedness]]. Therefore, where surrendered in [[cash]] directly to the [[lender]]/counterparty, [[initial margin]] creates ''negative'' indebtedness. In other words, the ''holder'' of [[initial margin]] is indebted to the ''provider'' of it. A counter-intuitive result to be sure; and part of the reason that, generally, [[regulatory initial margin]] is required to be posted in the form of securities or other custodial assets, and to a third party custodian, to whom (in theory) neither party has any credit exposure.
 
So [[initial margin]] is a defence against ''future potential indebtedness'', should it happen, not ''current'' indebtedness. Therefore, where surrendered in [[cash]] directly to the [[lender]]/counterparty, initial margin creates ''negative'' indebtedness. In other words, the ''holder'' of [[initial margin]] is indebted to the ''provider'' of it. A counter-intuitive result to be sure; and part of the reason that, generally, [[regulatory initial margin]] is required to be posted in the form of securities or other custodial assets, and to a third party custodian, to whom (in theory) neither party has any credit exposure.


===[[Stock lending]]===
Another example of this counter-intuitive effect is in the [[stock loan]] market, where the [[haircut]] on the collateral leg is effectively [[initial margin]], and since the {{gmslaprov|Borrower}} title-transfers (say) 105% of the value of the {{gmsla|Borrowed Securities}} to the {{gmslaprov|Lender}}, in fact the {{gmslaprov|Lender}} is indebted to the {{gmslaprov|Borrower}} and not the other way around. Hence the [[Pledge GMSLA]] of 2018, to solve this exact problem for bank counterparties’ LRD calculations.
Another example of this counter-intuitive effect is in the [[stock loan]] market, where the [[haircut]] on the collateral leg is effectively [[initial margin]], and since the {{gmslaprov|Borrower}} title-transfers (say) 105% of the value of the {{gmsla|Borrowed Securities}} to the {{gmslaprov|Lender}}, in fact the {{gmslaprov|Lender}} is indebted to the {{gmslaprov|Borrower}} and not the other way around. Hence the [[Pledge GMSLA]] of 2018, to solve this exact problem for bank counterparties’ LRD calculations.


===Compare and contrast===
Compare, by way of contrast, [[variation margin]].
{{sa}}
{{sa}}
*[[Margin call]]
*[[Margin call]]

Revision as of 13:35, 20 March 2020

The Jolly Contrarian’s Glossary
The snippy guide to financial services lingo.™

Initial margin and variation margin

Margin comes in two forms.

  • Variation margin, or VM, is collateral against the present mark-to-market value of the transaction exposure.
    • If you don’t have this and the counterparty goes bust, you’re whistling.
    • In many kinds of margin loan, VM will take the form of the asset in question itself.
  • Initial margin, or IM, is additional collateral in excess of the present mark-to-market value of the transaction exposure.
    • This guards against sudden adverse movements in the value of the collateral or the exposure between margin calls.
    • IM is calculated by reference to the expected maximum loss in value of the transaction (and the existing margin) over the margin period.
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Also known, to ISDAphiles, ninjas and the men and women of ISDA’s crack drafting squad™ as “Independent Amount” and to aggressive predictive text engines as “I’m”, this is the amount of collateral or margin a counterparty requires up front, notwithstanding any change in the mark-to-market value of the transaction.

So initial margin is a defence against potential future indebtedness, should it happen, not current indebtedness. Therefore, where surrendered in cash directly to the lender/counterparty, initial margin creates negative indebtedness. In other words, the holder of initial margin is indebted to the provider of it. A counter-intuitive result to be sure; and part of the reason that, generally, regulatory initial margin is required to be posted in the form of securities or other custodial assets, and to a third party custodian, to whom (in theory) neither party has any credit exposure.

Stock lending

Another example of this counter-intuitive effect is in the stock loan market, where the haircut on the collateral leg is effectively initial margin, and since the Borrower title-transfers (say) 105% of the value of the 2010 GMSLA to the Lender, in fact the Lender is indebted to the Borrower and not the other way around. Hence the Pledge GMSLA of 2018, to solve this exact problem for bank counterparties’ LRD calculations.

Compare and contrast

Compare, by way of contrast, variation margin.

See also

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