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Template:M summ 2018 CSD 3(c)(iii): Difference between revisions
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===[[Initial margin]] and [[independent amount]]s=== | ===[[Initial margin]] and [[independent amount]]s=== | ||
A common confusion in the {{isdama}} is its use of “{{csaprov|Independent Amount}}” to describe what everyone else in the market colloquially calls [[initial margin]]. Were they | A common confusion in the {{isdama}} is its use of “{{csaprov|Independent Amount}}” to describe what everyone else in the market colloquially calls [[initial margin]]. Were they the same? were they different? it was quite difficult on a cold read to say, especially as an {{csaprov|Independent Amount}} ''looks'', in the {{csa}}, 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 does not, and is called {{isdaprov|Transaction}}-by-{{isdaprov|Transaction}}.<ref>For a fuller discussion, see {{csaprov|Independent Amount}}.</ref> | ||
Anyway, opportunistically {{icds}} has solved that problem by introducing two kinds of Margin Amount in the {{imcsd}}: 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 me: once everyone | Anyway, opportunistically {{icds}} has solved that problem by introducing two kinds of Margin Amount in the {{imcsd}}: 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 me: once everyone knew {{csaprov|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. | 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. | ||
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The other difference is that ''usually'' you paid your IA directly, and by [[title transfer]], to your counterparty. Since generally dealers 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, Reg IM you must pay not to your dealer, but to a third-party [[custodian]], subject to 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]]. | The other difference is that ''usually'' you paid your IA directly, and by [[title transfer]], to your counterparty. Since generally dealers 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, Reg IM you must pay not to your dealer, but to a third-party [[custodian]], subject to 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 [[Reg IM]] comes in, the question becomes (a) do you still want your old IA delivered to you so you | So once the [[Reg IM]] comes in, the question becomes (a) do you still want your old IA delivered to you so you can reuse it — in total, or just any of it in excess of the new IM requirement? | ||
The {{imcsd}} proposes three ways of solving this: | The {{imcsd}} proposes three ways of solving this: | ||