Margin lending: Difference between revisions

The steps, in order, are:

1. '''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>

2. '''[[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. <br>

3. '''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]]. <br>

4. and 5. '''[[Reuse]]''': The PB [[reuse]]s the shares.  ''For [[cash prime brokerage]]'': where the client bought the shares outright the PB will “[[rehypothecate]]” the shares from the client’s custody account (that is, it will take title to them against a promise to give them back when the client needs them, basically). If it was a hedge to an equity swap, the broker already owned it outright. In either case

6. '''[[Collateral upgrade]]'''; The [[prime broker]] then borrows bonds that meet its [[treasury department]]’s exacting standards, using the reused shares from steps 4 and 5 as collateral. The lender of these bonds will often be an [[agent lender]] under an agency stock lending arrangement . Once these bonds settle into the [[prime broker]] it will...

7. '''Pay down its credit line''': Deliver the borrowed bonds back to the treasury department in reduction of the amount it borrowed under step 1.