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Margin lending: Difference between revisions
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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> | 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, | 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 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. | 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 steps, in order, are: | ||
#The [[PB]] acquires a credit line from its own treasury department. | #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 [[PB]] lends that money to its [[hedge fund]] client in a [[margin loan]]. | ||
#The HF buys a security with that money. | #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 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. | ||