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Template:M intro isda Party A and Party B: Difference between revisions
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Revision as of 08:52, 4 December 2023
, 4 December 2023→On the case for one-way margin
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Requiring a dealer to post margin to its customer against the customer’s net in-the-money position makes no sense whatsoever: | Requiring a dealer to post margin to its customer against the customer’s net in-the-money position makes no sense whatsoever: | ||
First, customers are trading their capital, dealers are not. Dealers are [[delta-hedge]]d against every customer. They are not “the other side of the trade”. A dealer’s “position” against a given client being “under water” in itself does not change the dealer’s risk of insolvency. Of course, dealers ''do'' present a risk of insolvency, and customers will have tolerate so much exposure to that risk, but the customer has other levers to manage that risk. They can close out their position, take profits and re-establish the position the new level, for one thing. That enables the dealer to close out its hedge, pass on the hedge gains and reset hedges and initial margin at the higher level. This is not the same has paying the mark-to-market of a unrealised swap. To be sure, customers might not ''like'' to have to do this — realising a gain has tax consequences, sends a market signal and involves stumping up more initial margin — but none of these are good reasons for anyone but the customer concerned. Giving customers the choice: keep your position open, but keep your money with the bank and live with the solvency risk — encourages prudent behaviour. It incentivises customers to diversify their risk. | |||
Secondly, dealers and banks are capitalised and regulated for systemic risk. There are already constraints on how they must operate, and how much capital they must hold against the contingency of portfolio losses. This capital is, in part, a function of the risk the banks have to their customers. That risk is greatly exaggerated if their clients have to post cash reflecting paper gains their clients have made but not yet realised. | Secondly, dealers and banks are already capitalised and regulated for systemic risk. There are already constraints on how they must operate, and how much capital they must hold against the contingency of portfolio losses. This capital is, in part, a function of the risk the banks have to their customers. That risk is greatly exaggerated if their clients have to post cash reflecting paper gains their clients have made but not yet realised. You might make the case that this regulation has been similarly ineffective, and some have<ref>Notably Gerd Gigerenzer, who has tracked the expansion in length of the Basel accords against the persistent rate of bank failure.</ref> but that the regulations don’t work well is hardly the bank’s fault, and nor is it a reason to introduce further rules that will have the effect of undermining then further. | ||
For this is ''exactly'' what bilateral variation margin does. Capital is the measure of “unallocated cash” available to meet the claims of general creditors. Cash being fungible, ''any'' cash on the balance sheet counts towards the capital ratio. A counterparty facing a bank holding a 100m uncollateralised | |||