Margin

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Confusingly, “margin” can mean different things:

• Spread: The spread or haircut a firm applies to a rate it offers its customer (such as an interest rate on a loan) — in the sense of a profit margin, or
• The collateral a firm requires from time to time to cover its existing mark-to-market exposure to its customer on a given product (this is called “variation margin”), or the additional amount, over and above variation margin, it requires upfront to cover potential deterioration in its mark-to-market exposure to its customer between the points (which could be daily, weekly or monthly, but these days tend to be daily) on which it can ask for more variation margin (this is called “initial margin”).

Prime brokerage

In the context of PB, margin could be:

• The total value of assets the prime broker requires its client to hold in excess of its total liabilities
• The prime broker’s general right to set and adjust that limit and call for additional assets at any time.

Start off with some fundamental observations about the prime brokerage product:

• The PB makes its money by lending to its clients. It does not make money