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===Mismargining===
===Mismargining===
Credit Suisse’s margining methodology for swaps was, from the outset, positively moronic. The JC is a legal eagle, not a credit guy, but even I could spot the flaws in this.
Credit Suisse’s margining methodology for swaps was, from the outset, positively moronic. The JC is a legal eagle, not a credit guy, but even I could spot the flaws in this.
*[[Static margining]]:  [[Initial margin]] was calculated based on the notional value of the swap at inception — the initial [[Strike Price - Equity Derivatives Provision|strike price]], for [[equity derivatives]] nuts — and not referenced to the ''current'' value of the [[underlier]]. This means, as the swap value went up, the relative value of the posted initial margin, proportionately, went ''down''. 15% initial margin at 100 is the same as 7.5% margin at 200.
:Now, you might say, the guy is making money! Why should he have to pay more initial margin where his trades are in the money? Well, because of [[variation margin]]. This has the effect of settling daily, in cash, all gains the client has made on the transaction. Rather than taking in more money from the client, the broker is paying money ''out''. This is especially nasty if the client is using the broker’s variation margin, as Hwang did, to double down on the same trade.
*[[TRS]] not [[synthetic equity]]: CS appears to have documented the trades as “total return swaps” under a standard equity derivatives master confirmation agreement, and not synthetic equity derivatives under a portfolio swap master confirmation. The differences are subtle, but there are two in particular: TRS tend to be “bullet” swaps with a scheduled termination date and as a result do not “[[re-strike|restrike]]” before maturity, and are [[statical margin|statically margined]].  Portfolio swaps are designed to replicate cash prime brokerage; there is not a specified maturity date, so the notional restrikes periodically (like, monthly), and [[initial margin]] is calculated daily against the prevailing “{{eqderivprov|Final Price}}” rather than the original “{{eqderivprov|Initial Price}}”
*[[TRS]] not [[synthetic equity]]: CS appears to have documented the trades as “total return swaps” under a standard equity derivatives master confirmation agreement, and not synthetic equity derivatives under a portfolio swap master confirmation. The differences are subtle, but there are two in particular: TRS tend to be “bullet” swaps with a scheduled termination date and as a result do not “[[re-strike|restrike]]” before maturity, and are [[statical margin|statically margined]].  Portfolio swaps are designed to replicate cash prime brokerage; there is not a specified maturity date, so the notional restrikes periodically (like, monthly), and [[initial margin]] is calculated daily against the prevailing “{{eqderivprov|Final Price}}” rather than the original “{{eqderivprov|Initial Price}}”


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''{{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|Report on Archegos Capital Management}}''
''{{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|Report on Archegos Capital Management}}''
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