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 ===Mis-margining===
-Credit Suisse’s margining methodology for swaps was, from the outset, positively moronic. The JC is a [[legal eagle]], not a [[credit]] guy, ''but'' even ''he'' could spot the flaws in this.
+Credit Suisse’s margining methodology for swaps was, from the outset, ''not great''. The JC is a [[legal eagle]], not a [[credit]] guy, ''but'' even ''he'' could spot the flaws in this.
-*'''[[TRS]] not [[synthetic equity]]''': CS appears to have documented the trades as “[[total return swap]]s” under a standard [[equity derivatives]] [[master confirmation]], and not as “[[synthetic prime brokerage]]” under a portfolio swap master confirmation. The differences are subtle, but there are two in particular:
+====Static margin====
-:*[[TRS]] tend to be “[[Bullet swap|bullet]]” swaps with a scheduled termination date and do not “[[re-strike|restrike]]” their notional before maturity, and they are [[static margin|statically margined]].
+For one thing, CS seems to have documented the trades as “[[total return swap]]s” under a standard [[equity derivatives]] [[master confirmation]], and not as “[[synthetic prime brokerage]]” under a [[portfolio swap]] master confirmation. The differences are subtle, but important.
-:*[[Portfolio swap]]s are designed to replicate cash [[prime brokerage]]; the investor does not have a specified maturity date in mind at the outset, and may keep a swap on for a day or five years, so the broker is completely in the dark as to the likely tenor of the trade. This makes fixing an amount of margin upfront fraught. To assist with nerves in the risk department, the notional of synthetic equity [[re-strike]]s periodically (like, monthly), and [[initial margin]] is calculated daily against the ''prevailing'' “{{eqderivprov|Final Price}}” rather than the ''original'' “{{eqderivprov|Initial Price}}”. Archegos swaps were, typically, bullet swaps margined with a fixed amount up front. As they appreciated, the margin value as a proportion of their prevailing value eroded. Archegos apparently used the [[variation margin]] it was earning through those appreciating positions to double down on the same trades — ''also'' static margine — pushing the equity price further up, exacerbating the problem. His swap portfolio was a ticking time-bomb.
-*'''They didn’t keep an eye on the direction of the portfolio''': Archegos at first used the swap book to put on short positions that offset the long bias on its cash book. It used this bias to argue for lower margins — a request the business accommodated, provided the combined portfolio bias did not exceed 75% long or short. Over time Archegos frequently exceeded these limits, often for months at a time, but CS took no action, accepting Archegos’ promises to correct the bias.
+Firstly, [[total return swap]]s tend to be “[[Bullet swap|bullet]]” swaps with a fixed term and a scheduled termination date. As such, often they do not “[[re-strike|restrike]]” their notional before maturity, and are [[static margin|statically margined]].
+By contrast, [[portfolio swap]]s are designed to replicate “physical” [[prime brokerage]]: there is no specified maturity date (in the same way there is no maturity date when you buy a stock: you just sell it when you think it won’t go up any more), and investors may keep swaps on for a day or five years: the swap dealer is completely in the dark as to the likely tenor of the trade. This makes fixing an amount of margin upfront fraught.
+To assist with nerves in the risk department, the synthetic equity swap [[re-strike]] periodically (like, monthly), meaning you rebase your initial margin, even if static, to the prevailing price of the stock each period, undoing any “margin erosion” that might otherwise have occurred due to the appreciation of the position. Not only that, but [[initial margin]] isn’t static: it is dynamic; calculated daily against the ''prevailing'' “{{eqderivprov|Final Price}}” rather than the ''original'' “{{eqderivprov|Initial Price}}”.
+====When variation margin attacks====
+Since the swaps [[Static margin|static margined]], As they appreciated, the margin value as a proportion of their prevailing value eroded. Archegos apparently used the [[variation margin]] it was earning through those appreciating positions to double down on the same trades — ''also'' static margin — pushing the equity price further up, exacerbating the problem. His swap portfolio was a ticking time-bomb.
+====They didn’t keep an eye on the direction of the portfolio====
+Archegos at first used the swap book to put on short positions that offset the long bias on its cash book. It used this bias to argue for lower margins — a request the business accommodated, provided the combined portfolio bias did not exceed 75% long or short. Over time Archegos frequently exceeded these limits, often for months at a time, but CS took no action, accepting Archegos’ promises to correct the bias.
 *'''They didn’t take ''enough'' margin''': Archegos pressured CS to lower its swap margins, citing more favourable margins it was getting from other brokers due to the effect of [[cross-margining]].