Template:M intro isda Party A and Party B: Difference between revisions

First, customers — and here I mean buy-side market participants ''who do not themselves post systemic risk''<ref>There are different considerations for those who pose market risk, but these should be dealt with by equivalent capital regulation and limitations on leverage and so on: in a perfect world, buy-side entities would never get so big as to pose systemic risk.<> — there are trading on their capital, dealers are not.<ref>Dealers hold capital primarily against counterparty failure, remember, not market risk itself: absent counterparty failure they should have none.</ref> — are the ones who are willingly putting themselves in harm’s way. They are taking on risk: that is what they are there for. Of course, dealers ''do'' present some risk of insolvency, and customers should only tolerate so much exposure to that risk, but the customer has other levers to manage it. They can close out their positions, take profits and re-establish their position at the current level, or with another dealer, for one thing. If they do that, the dealer can close out its hedge, pass on gains whilst being off risk, and then restrike its hedges and initial margin at the higher level if need be.<ref>A grave factor in [[Credit Suisse]]’s losses on [[Archegos]] was “margin erosion” caused by massive appreciation on its swap positions. While Credit Suisse was unusual in not using “dynamic margining” (which solves the “margin erosion” problem) to its [[Synthetic prime brokerage|synthetic equity derivatives]] book, “static” [[initial margin]] is the rule for other asset classes, and for [[regulatory IM]].</ref> ''This is not the same as paying out the [[mark-to-market]] of a unrealised swap''.