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:—CNBC, March 23, 2021}} | :—CNBC, March 23, 2021}} | ||
{{archegos capsule}} | {{archegos capsule}} | ||
''This is very different from cash margin lending''. Had Archegos put the equivalent ''physical'' positions on, using [[margin loan]]s, its brokers would ''not'' have ''had'' to advance it the cash value of its net equity. They may well have done so, of course – | Now here is an interesting thing. Because [[Archegos]] gained their market exposure using [[Equity derivatives|swaps]], ''by regulation'', their brokers were ''obliged'' to pay the value of their net equity to them, every day, in the form of [[variation margin]]. To be sure, the broker usually pays [[VM]] into an account it runs for its client. There are withdrawal thresholds that apply to that account that takes into account required [[initial margin]] — oh, that’s another story altogether — but over those thresholds all the variation margin is the client’s money, available to be withdrawn on request. | ||
This is completely normal in the world of latter-day derivatives: mandatory two-way exchange of [[variation margin]] was implemented by regulation in pretty much every major market ''in the name of reducing systemic risk'' — but all the same, it is utterly weird. It is like ''forced'' lending against asset appreciation. Imagine if your bank, by law, had to pay you the cash value of any increase in your home’s value over the life of your mortgage. | |||
''This is very different from cash margin lending''. Had Archegos put the equivalent ''physical'' positions on, using [[margin loan]]s, its brokers would ''not'' have ''had'' to advance it the cash value of its [[net equity]]. They may well have ''willingly'' done so, of course – that is how [[prime broker]]s make their money after all — but there are times when the world is going to hell and it is quite a nice thing to respectfully decline. | |||
Indications of forthcoming hell: your client’s positions, in thinly traded stocks, rallying enormously, inexplicably, against the rest of the market. What goes up must come down; what goes up ''quickly'' tends to come down ''even more quickly''. And so it transpired. | |||
Even in the | Even in the |