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 What a world we live in.
+====Para 3(c) Margin Approach====
+Para 3(a) is the point where, with the greatest of respect, the {{icds}} got ''totally'' over the front of their skis. Had they just reined in their enthusiasm, and limited themselves to dealing with *just* regulatory IM, that actually has to be posted, compulsorily, to a third-party custodian, this document would have been shorter, less controversial, and ''way'' easier to understand. But no: they went into bafflement overdrive.
+A casual reader might also wonder whether someone is having a laugh, at our expense, about ''how'' these undoubtedly overcomplicated provisions are expressed. {{icds}} could scarcely have made this ''more'' convoluted, as our nutshell summary to the right should indicate.
+=====Initial margin and independent amounts=====
+A common confusion in the [[ancient CSA]]s used to be the use of “Independent Amount” to describe what everyone else in the market colloquially calls [[initial margin]].
+Were they the same? Were they different? It was difficult, on a cold read to say. Especially as an {{{{1}}}|Independent Amount}} ''looks'' like it is meant to function as a distinct amount of standalone credit protection, held without reference to a given {{isdaprov|Transaction}}, but in practice it never works that way. Counterparties set and call Independent Amounts on a {{isdaprov|Transaction}}-by-{{isdaprov|Transaction}} basis. (For further discussion, see {{{{{1}}}|Independent Amount}}.)
+Anyway, {{icds}} has “solved” that problem by introducing ''two'' kinds of “Margin Amount” in the {{imcsd}}, and giving them ugly parenthetic suffixes: the {{imcsdprov|Margin Amount (IM)}} and the {{imcsdprov|Margin Amount (IA)}}. Maybe someone thought this was a neat trick, I don’t know. It seems a dumb one to JC: where, once upon a time, everyone knew {{{{{1}}}|Independent Amount}} and [[initial margin]] were, for all intents and purposes, the same; now they are subtly different.
+The problem {{icds}} was trying to “solve for” was the swap counterparty who is ''already'' taking [[initial margin]] and wants to keep doing that, its own way, somehow, even now the technocrats have railroaded their way into the room and mandated by regulation their own version [[initial margin]], which you must do ''their'' way.
+These counterparties include, for example, those in a [[prime brokerage]] relationship, who might have their swap positions “cross-margined” with a wider range of physical and futures positions that their prime brokers will want to margin — and rehypothecate — as a single pool of assets and liabilities.
+But it might be as simple as a dealer who has set its {{csaprov|Independent Amount}}s higher than those mandated by the regulators, and wants to keep the higher value.
+So the {{imcsd}} contemplates, on one hand, ''regulatory'' [[initial margin]], which it calls “{{imcsdprov|Margin Amount (IM)}}”, and ''non''-regulatory [[initial margin]], which it labels with fond redolence to the old days of {{csaprov|Independent Amount}}s, as “{{imcsdprov|Margin Amount (IA)}}”.
+====The theory of the Margin Approach====
+Let’s call your existing, pre-regulatory, contractual initial margin arrangement your “IA”, and the regulatory requirement “IM”. IA could be more than IM, less than IM, or (unlikely, but let’s say) the same. Now everyone must post at least IM, so the only realistic scenarios are (i) those who want extra IA over the regulatory-prescribed IM, and (ii) those who don’t.
+The other difference is that ''usually'' you paid your IA directly, and by [[title transfer]], to your counterparty. Since, generally, [[dealer]]s would require IM, but customers would not, this had the curious effect of ''increasing'' the customer’s credit exposure to the [[dealer]], at the same time it reduced the dealer’s market exposure against the customer. But — and for that very reason — you must pay regulatory initial margin not to your [[dealer]], but to a third-party [[custodian]], under a security arrangement and an [[account control agreement]], to avoid exacerbating counterparty credit risk the other way.
+The regulatory regime is therefore economically not the same as the previous non-regulatory IA regime, as the recipient cannot monetise the regulatory initial margin it receives, or use it elsewhere in its business. This [[reuse]] right is important for those involved in [[margin lending]].
+So once the regulatory initial margin comes in, the question becomes: do you still want your old IA delivered to you personally, so you can [[reuse]] it — in total, or just any of it in excess of the new regulatory IM requirement?
+The {{imcsd}} proposes three ways of solving this:
+*'''[[Distinct Margin Flow (IM) Approach - IM CSD Provision|Distinct Margin Flow Approach]]''': you pay IM under the {{imcsd}} and pay the whole IA whack, separately, to the counterparty under the {{imcsdprov|Other CSA}}. Obviously enough, customers are not going to like this.
+*'''[[Allocated Margin Flow (IM/IA) Approach - IM CSD Provision|Allocated Margin Flow Approach]]''': you pay the Reg IM portion of the IA under the {{imcsd}}, and pay any excess over that in the IA to the counterparty under the {{imcsdprov|Other CSA}}. To the JC’s way of thinking, this is the only one that makes any sense;
+*'''[[Greater of Margin Flow (IM/IA) Approach - IM CSD Provision|Greater of Margin Flow Approach]]''': You pay the ''whole'' of the IA (or the IM, if it is greater) under the {{imcsd}} and ''nothing'' under the {{imcsdprov|Other CSA}}. We don’t think the broker will ever give up the right to reuse excess IA by steering that to a third party custodian, and nor, really should the client, since their implied financing rates will surely rise.
+====Allocated Margin Flow is the best bet====
+We think that almost all punters will go for the [[Allocated Margin Flow (IM/IA) Approach - IM CSD Provision|Allocated Margin Flow]] approach as this best deals with the regulatory obligation without ''unduly'' penalising either side or changing the basic economics — though where the {{imcsdprov|Secured Party}} would otherwise be in the [[Rehypothecation|rehypothecation]] game, it ''does'' change the economics ''a bit'' — thus, render unto CESR what is required by CESR;<ref>This was ALMOST an awesome pun. It doesn’t ''quite'' work, seeing as (a) the [[Committee of European Securities Regulators]] was formally disestablished in 2011 and replaced by [[ESMA]]; and (b) you render your Reg IM unto a custodian, not to ESMA (or CESR) anyway. But still, it was close enough to roll the dice on it anyway Hope you like it.</ref> pay any excess over that to your counterparty.
+It leaves one rather arid and academic dispute that one may quickly tire of having, as to whether the excess should be over one’s {{imcsdprov|Credit Support Amount (IM)}} — being the amount one is ''obliged'' to post to the {{imcsdprov|Custodian (IM)}} by way of [[regulatory margin]]  — or one’s {{imcsdprov|Posted Credit Support (IM)}} — being the amount one actually ''has'' posted to the {{imcsdprov|Custodian (IM)}} — these may be different if you are in the habit of operational laxity in providing Reg IM or reclaiming it when it is no longer required, or you have just blown up and missed a call — and we consider this further below.

Template:Csa Margin Amount and Approach summ: Difference between revisions

Template:Csa Margin Amount and Approach summ (view source)

Revision as of 12:18, 13 May 2024

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