Margin lending
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SFTR Anatomy™
Regulation on Transparency of Securities Financing Transactions and of Reuse (2015/2365/EC (EUR Lex)), aka the securities financing transactions regulation 3(10) ‘margin lending transaction’ means a transaction in which a counterparty extends credit in connection with the purchase, sale, carrying or trading of securities, but not including other loans that are secured by collateral in the form of securities;
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A margin lending transaction is one where one party lends money to another so it can buy or sell securities. The lender will lend up to a certain value of the securities. If the securities fall in value, the lender may ask the borrower to post margin to cover the value of the margin loan.
Usually the borrower lets the lender hold the securities as collateral for the margin loan. The borrower may also allow the lender to use those securities in the market to offset its funding costs of making the margin loan.
This is the classic prime brokerage trade. I'm a hedge fund, and I am all about Vega — the Greek that denotes leverage.[1]
How do I get my spectacular returns? Alpha Leverage, that’s how. I buy securities “on margin”. This means I buy the security, and you, dear prime broker, pay for it. Well, strictly speaking, you lend me the funds I need to pay for it, but in practice you settle the transaction directly with the executing broker and you take delivery of the security on my behalf. For, in return for your loan, I let you look after the security for me, whereby you can (A) have a security interest over it to secure your loan, and (B) you can rehypothecate it into the market to defray your funding costs of providing me the loan in the first place.
I must pay you initial margin as cover should the value of my new asset decline against repayment value of the outstanding loan.
See also
References
- ↑ “My name is Vega. I live on the second floor. I live upstairs from you. Yes, I think you’ve seen me before.” — Suzanne Luca