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Margin lending: Difference between revisions
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{{a|sftr|{{SFTR 3(10)}}<br>}}{{margin loan}} | {{a|sftr|[[File:Margin loan lifecycle.png|450px|thumb|center|A blueprint for [[margin lending]], yesterday]]{{SFTR 3(10)}}<br>}}{{margin loan}} | ||
This is the classic [[prime brokerage]] trade. | This is the classic [[prime brokerage]] trade. I’m a [[hedge fund]], and I am all about [[vega|Vega]] — the [[Greeks|Greek]] that denotes [[leverage]].<ref>“My name is [[Vega]]. I live on the second floor. I live upstairs from you. Yes, I think you’ve seen me before.” — [[Vega|Suzanne Luca]]</ref> | ||
How do I get my spectacular returns? <s>[[Alpha]]</s> [[Leverage]], that’s how. I buy securities “[[Margin lending transaction - SFTR Provision|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 | How do I get my spectacular returns? <s>[[Alpha]]</s> [[Leverage]], that’s how. I buy securities “[[Margin lending transaction - SFTR Provision|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 the stentorian funding costs your treasury department chrged you to give you the money you needed to providing me with the [[margin 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. | I must pay you [[initial margin]] as cover should the value of my new asset decline against repayment value of the outstanding margin loan. | ||
{{ | |||
The steps, in order, are: | |||
#The [[PB]] acquires a credit line from its own treasury department. business being business, and capital charges being capital charges, this is eye-wateringly expensive. | |||
#The [[PB]] lends that money to its [[hedge fund]] client in a margin loan. | |||
#The HF buys a security with that money. | |||
#The HF settles the security into its custody account with the PB. From the PB’s perspective the deal is this: I pay for (most of) your asset; you settle the asset to me, where I can (i) look after it for you, (ii) hold it as [[collateral]] for your [[Margin loan]], and (iii) [[reuse]] it to reduce my funding costs. | |||
#The PB accordingly does reuse the asset. It “[[rehypothecate]]s” it (takes title to it, basically) and uses it as [[collateral]] to a [[stock borrow loan]] ... | |||
#...under which it has borrowed high-quality bonds from the market that meet its treasury department’s exacting standards, whereupon it | |||
#Delivers the borrowed bonds to Treasury for them to use in their treasury operations. They are so pleased they give the [[prime broker]] a credit on its eye-watering financing rate it charged it under step 1. | |||
Easy. | |||
{{sa}} | |||
*[[Prime brokerage]] | *[[Prime brokerage]] | ||
*[[Rehypothecation]] | *[[Rehypothecation]] | ||
*[[Greeks]] | *[[Greeks]] | ||
{{ref}} | {{ref}} | ||