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Margin excess: Difference between revisions
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{{a|pb|{{subtable| | {{a|pb|{{subtable| | ||
===Margining: a primer=== | ===Margining: a primer=== | ||
{{pb margining capsule}}}}}} | {{pb margining capsule}}}}}}, or “[[margin excess]]”, is ''potential'' margin: any amount standing to a customer’s account with a [[prime broker]] ''over and above'' the minimum margin that the [[prime broker]] requires the customer to hold against its [[liabilities]]. Margin excess may be in the form of unrealised profit from live transactions, [[variation margin]] on swap positions credited to the customer’s account, or excess assets the customer has paid for but holds with the prime broker as [[custodian]]. | ||
The [[prime broker]] holds or controls it — possession is nine-tenths of the law — but, as long as it stays as “margin excess” — see below — must give it back to the customer on request. | The [[prime broker]] holds or controls it — possession is nine-tenths of the law — but, as long as it stays as “margin excess” — see below — must give it back to the customer on request. | ||
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As long as you have a margin excess, you shouldn’t need to make a [[margin call]] — a [[margin adjustment]] will do. | As long as you have a margin excess, you shouldn’t need to make a [[margin call]] — a [[margin adjustment]] will do. | ||
While the PB holds excess | While the PB holds margin excess it is subject to all the usual [[Security collateral arrangement|security arrangements]]; the only difference is that the customer is not ''obliged'' to let the PB hold it, as such; but customers habitually do, because it is convenient — they have to hold it somewhere, so why not with the good old [[prime broker]]? — and because it tends to make their [[prime broker]]s feel better about things. And as long as the prime broker has the right to [[Margin adjustment|adjust margin]] ''at any time'', it is justified in feeling quite good about it. If the prime broker must give even a brief notice period ''before'' adjusting, then things are quite a bit more fraught. | ||
===“As long as it stays as | ===“As long as it stays as margin excess”=== | ||
The reality about just when a customer may ask for its excess | The reality about just when a customer may ask for its margin excess back — “whenever it likes”, in the normal run of things — can startle a complacent risk officer, but what a startled risk officer can then do, should it not terribly ''like'' the idea of giving the margin excess back — is to immediately reclassify it as ''required'' [[margin]] by means of a [[margin adjustment]]. | ||
'''Careful, though''': all this, however, is quickly undermined — as those at Credit Suisse in charge of risking The Client Who Shall Not Be Named would tell you, if any of them were left — if there is any notice period before a margin adjustment takes effect, or if there is a margin lock-up. | '''Careful, though''': all this, however, is quickly undermined — as those at Credit Suisse in charge of risking [[The Client Who Shall Not Be Named]] would tell you, if any of them were left — if there is any notice period before a [[margin adjustment]] takes effect, or if there is a margin lock-up. | ||
===Is excess | ===Is margin excess “as good as” initial margin?=== | ||
Yes — and no. This is the subtitle to that grand Shakespeareian tragedy of our times, ''[[Archegos|The Merchant of Menace]]''. | Yes — and no. This is the subtitle to that grand Shakespeareian tragedy of our times, ''[[Archegos|The Merchant of Menace]]''. | ||
As a starting proposition, excess customer cash you hold, and that you may, at a [[commercially reasonable|(commercially reasonable)]] whim, declare ''instantly'' to be initial margin is, in legal theory, near enough the same as initial margin. If a client should ask you for it, you can, on the spot, recharacterise it and refuse. ''But'' this changes should there be any notice period between your ''pronouncement'' that it is initial margin, and it formally becoming, under the terms of your contract, initial margin. Because in this windy period a customer may, as TCWMNBN ''did'', demand that you pay it back. | As a starting proposition, excess customer cash you hold, and that you may, at a [[commercially reasonable|(commercially reasonable)]] whim, declare ''instantly'' to be [[initial margin]] is, in legal theory, near enough the same as [[initial margin]]. If a client should ask you for it, you can, on the spot, recharacterise it and refuse. ''But'' this changes should there be any notice period between your ''pronouncement'' that it is initial margin, and it formally becoming, under the terms of your contract, initial margin. Because in this windy period a customer may, as [[TCWMNBN]] ''did'', demand that you pay it back. | ||
Secondly, bear in mind the human aspects at play, as so saucily expounded in the {{CS report}}. | Secondly, bear in mind the human aspects at play, as so saucily expounded in the {{CS report}}. | ||