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With this provision it looks like the ’squad got to the point of maximum disarray, with all rocks upturned and slaters, bugs and cockroaches scuttling everywhere, and it just had a tantrum and stormed off. These provisions don’t even make ''sense''. They are not even ''grammatical''. | With this provision it looks like the ’squad got to the point of maximum disarray, with all rocks upturned and slaters, bugs and cockroaches scuttling everywhere, and it just had a tantrum and stormed off. These provisions don’t even make ''sense''. They are not even ''grammatical''. | ||
===The basic problem=== | ===The basic problem, part I=== | ||
The problem to be solved is this: [[initial margin]] is designed to cover [[mark-to-market]] [[exposure]] between (usually daily) [[variation margin]] calls. It is usually calculated to cover the likely possible change in portfolio value over that “liquidity period”, given the potential drop in collateral value over the same period. That is, ''one day''. | The problem to be solved is this: [[initial margin]] is designed to cover [[mark-to-market]] [[exposure]] between (usually daily) [[variation margin]] calls. It is usually calculated to cover the likely possible change in portfolio value over that “liquidity period”, given the potential drop in collateral value over the same period. That is, ''one day''. | ||
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But fundamentally, this is just one of those risks it would be lovely to banish, but you can’t. Sorry, regulators! | But fundamentally, this is just one of those risks it would be lovely to banish, but you can’t. Sorry, regulators! | ||
===The basic problem part II=== | |||
===What were they ''trying'' to achieve? go figure.=== | ===What were they ''trying'' to achieve? go figure.=== | ||
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Until the {{isdama}} has been fully closed out and the {{isdaprov|Early Termination Amount}} — that is, the total amount due following termination and valuation of all {{isdaprov|Transaction}}s following the default — determined, you don’t definitively know what you are owed — even ''if'' you are owed anything: only one party to an {{isdama}} can be owed something, remember — so until then, what business have you got appropriating the {{imcsdprov|Initial Margin}}? Nor do you have any credit risk over it: it is held at a third party and [[secured]] in your favour. ''Cool your jets''. | Until the {{isdama}} has been fully closed out and the {{isdaprov|Early Termination Amount}} — that is, the total amount due following termination and valuation of all {{isdaprov|Transaction}}s following the default — determined, you don’t definitively know what you are owed — even ''if'' you are owed anything: only one party to an {{isdama}} can be owed something, remember — so until then, what business have you got appropriating the {{imcsdprov|Initial Margin}}? Nor do you have any credit risk over it: it is held at a third party and [[secured]] in your favour. ''Cool your jets''. | ||
But that event — by our read, a “Failure to Pay Early Termination Amount” — isn’t even the default value for a {{imcsdprov|Secured Party Rights Event}}: rather, it is one of a tangled menu of alternatives. | But that event — by our read, a “Failure to Pay Early Termination Amount” — isn’t even the default value for a {{imcsdprov|Secured Party Rights Event}}: rather, it is one of a tangled menu of alternatives. | ||