Margin lending: Difference between revisions

Margin lending (view source)

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 I must pay you [[initial margin]] as cover should the value of my new asset decline against repayment value of the outstanding margin loan.
+===The life cycle of a [[margin loan]]===
 The steps, in order, are:
-#The [[PB]] acquires a credit line from its own [[treasury department]]. Business being business, and capital charges being capital charges, this is eye-wateringly expensive.
+. '''Treasury funding''': The [[PB]] borrows from its own [[treasury department]]. Business being business, and capital charges being capital charges, this is eye-wateringly expensive for the [[prime broker]]. <br>
-#The [[PB]] lends that money to its [[hedge fund]] client in a [[margin loan]].
+. '''[[Margin loan]]''': Where the client is buying shares outright'': The [[PB]] lends that money to its [[hedge fund]] client in a [[margin loan]] to the client can buy some shares. ''Where the client is taking synthetic exposure to the shares'': The [[PB]] uses the treasury funds to buy shares for its own book to hedge the [[synthetic equity swap]]. This latter case is not, technically a margin loan — it’s an equity swap — ''but the two are economically identical''. So we will treat [[equity swap]]s as [[margin loan]]s for all intents and purposes.
-#The HF buys a security with that money.
+. ''''Share settlement''': ''For [[cash prime brokerage]]'': The client will direct the [[prime broker]] to deliver shares into its custody account with the PB in settlement of the trade. ''For [[synthetic prime brokerage]]'': The [[prime broker]] settles the shares into its own hedge account. In some markets this may happen by the mysterious process of the [[equity give-up]].
-#The HF settles the security into its custody account with the PB. From the PB’s perspective the deal is this: I pay for (most of) your asset; you settle the asset to me, where I can (i) look after it for you, (ii) hold it as [[collateral]] for your [[Margin loan]], and (iii) [[reuse]] it to reduce my funding costs.
+. The PB [[reuse]]s the share. If it is a custody asset that the client bought outright it “[[rehypothecate]]s” it (takes title to it, basically). If it was a hedge to an equity swap, the broker already owned it outright. In either case the prime broker then uses the shares as [[collateral]] in a [[stock loan]] under which it borrows good-credit quality bonds that meet its treasury department’s exacting standards. It will often source these from an [[agent lender]] under an agency stock lending arrangement. Once these have settle the [[prime broker will...
-#The PB accordingly does reuse the asset. It “[[rehypothecate]]s” it (takes title to it, basically) and uses it as [[collateral]] to a [[stock borrow loan]] ...
+. Deliver the borrowed bonds back to the treasury department in reduction of the amount it borrowed under step 1.
-#...under which it has borrowed high-quality bonds from the market that meet its treasury department’s exacting standards, whereupon it
-#Delivers the borrowed bonds to Treasury for them to use in their treasury operations. They are so pleased they give the [[prime broker]] a credit on its eye-watering financing rate it charged it under step 1.
 Easy.