Margin lending: Difference between revisions

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-{{fullanat|sftr|3(10)|}}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]]
+{{aai|pb|{{image|Margin loan lifecycle|png|A blueprint for [[margin lending]], yesterday}}'''As defined in [[SFTR]]'''{{subtable|{{SFTR 3(10)}}}}<br>}}{{d|Margin lending|/ˈmɑːʤɪn ˈlɛndɪŋ/|n|}}
-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 your funding costs of providing me the loan in the first place.
+{{margin loan}}
-I must pay you [[initial margin]] as cover should the value of my new asset decline against repayment value of the outstanding loan.
+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>
-{{seealso}}
+How do I get my spectacular returns? {{strike|Alpha|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 so I can pay for it, but in practice, you will be settling the transaction directly with the [[executing broker]] and taking delivery of the security on my behalf, under our [[margin loan]]. That’s right: in return for lending me the money, you get to “look after” the shares for me, so you can both (i) take [[security]] over them to secure the loan, and (ii) [[reuse]] those shares — usually using them as collateral when you borrow treasuries in the stock loan market which you can give to your treasury department to offset the funding costs they charged you to to finance the [[margin loan]] you made to me 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 margin loan.
+===The life cycle of a [[margin loan]]===
+The steps, in order, are: <br>
+:1. '''Treasury funding''': The [[PB]] borrows from its own [[treasury department]]. Business being business, and capital charges being capital charges, this is eye-wateringly expensive for the [[prime broker]]. <br>
+:2. '''[[Margin loan]]''': Where the client is buying shares outright'': The [[PB]] lends that money to its [[hedge fund]] client in a [[margin loan]] to the client can buy some shares. ''Where the client is taking synthetic exposure to the shares'': The [[PB]] uses the treasury funds to buy shares for its own book to hedge the [[synthetic equity swap]]. This latter case is not, technically a margin loan — it’s an equity swap — ''but the two are economically identical''. So we will treat [[equity swap]]s as [[margin loan]]s for all intents and purposes. <br>
+:3. '''Share settlement''': ''For [[cash prime brokerage]]'': The client will direct the [[prime broker]] to deliver shares into its custody account with the PB in settlement of the trade. ''For [[synthetic prime brokerage]]'': The [[prime broker]] settles the shares into its own hedge account. In some markets this may happen by the mysterious process of the [[equity give-up]]. <br>
+:4. and 5. '''[[Reuse]]''': The PB [[reuse]]s the shares.  ''For [[cash prime brokerage]]'': where the client bought the shares outright the PB will “[[rehypothecate]]” the shares from the client’s custody account (that is, it will take title to them against a promise to give them back when the client needs them, basically). If it was a hedge to an equity swap, the broker already owned it outright. In either case: <br>
+:6. '''[[Collateral upgrade]]''': The [[prime broker]] then borrows bonds that meet its [[treasury department]]’s exacting standards, using the reused shares from steps 4 and 5 as collateral. The lender of these bonds will often be an [[agent lender]] under an agency stock lending arrangement . Once these bonds settle into the [[prime broker]] it will... <br>
+:7. '''Pay down its credit line''': Deliver the borrowed bonds back to the [[treasury department]] in reduction of the amount it borrowed under step 1. <br>
+Easy.
+{{sa}}
+*[[Prime brokerage transactions]]
 *[[Prime brokerage]]
 *[[Rehypothecation]]
 *[[Greeks]]
+{{ref}}
+{{newsletter|5/2/2021}}