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When variation margin attacks (view source)
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==== Intermediaries ==== | ==== Intermediaries ==== | ||
There are various types of intermediary in the market: those that are part of the market infrastructure, like [[Exchange|stock exchange]]<nowiki/>s, [[clearing system]]<nowiki/>s, securities depositories and so on; then those agents who earn only a commission from their involvement, and take no principal risk<ref>I include here “[[quasi-agent]]” roles that are conducted on a [[riskless principal]], but (absent insolvency) are economically neutral: thse participants are remunerated by [[commission]] or fixed [[mark-up]] and do not have “[[Skin in the Game: Hidden Asymmetries in Daily Life - Book Review|skin in the game]]”.</ref> at all: [[Cash brokerage|cash broker]]<nowiki/>s, [[Investment manager|investment managers]], [[Clearing broker|clearer]]<nowiki/>s, [[Market-maker|market-makers]] and [[Intermediate broker|intermediate brokers]] and then there are those but the thing they have in common is | There are various types of intermediary in the market: those that are part of the market infrastructure, like [[Exchange|stock exchange]]<nowiki/>s, [[clearing system]]<nowiki/>s, securities depositories and so on; then those [[Agent|agents]] who earn only a [[commission]] from their involvement, and take no [[principal]] risk<ref>I include here “[[quasi-agent]]” roles that are conducted on a [[riskless principal]], but (absent insolvency) are economically neutral: thse participants are remunerated by [[commission]] or fixed [[mark-up]] and do not have “[[Skin in the Game: Hidden Asymmetries in Daily Life - Book Review|skin in the game]]”.</ref> at all: [[Cash brokerage|cash broker]]<nowiki/>s, [[Investment manager|investment managers]], [[Clearing broker|clearer]]<nowiki/>s, [[Market-maker|market-makers]] and [[Intermediate broker|intermediate brokers]]; and then there are those who ''do'' take principal risk, but only by lending to the end users, and again don’t participate in the upside or downside<ref>Barring through “gap loss” where, due to portfolio losses, the customer is insolvent and cannot repay its loan.</ref> of the investments they are financing. In all cases the thing they have in common is that their financial interest is independent of the performance of the instruments in which they are dealing. | ||
The interesting case is the [[swap dealer]]: being a counterparty to a [[derivative]] contract, a [[swap dealer]] is the other side of the trade to its customer and therefore, nominally, fully exposed to the [[underlier]]’s performance. However, [[swap dealer]]<nowiki/>s are generally [[Delta-hedging|delta-hedged]] and in many cases are prohibited by regulation from taking proprietary positions.<ref>This is the famous “Volcker Rule”.</ref> | |||
Intermediaries tend to be regulated and those that take on indebtedness are subject to stringent capital requirements designed precisely to minimise their risk of failure. | |||
==== End users ==== | |||
End users are those market participants who ''do'' have skin in the game: they take all the benefits — less the fees, commissions and financing costs of their intermediaries — and absorb all the losses of their investments. They may be institutional (pension funds, investment funds, multinationals) or retail (private investors) and while the range of investment products they can invest in will depend on their sophistication and financial resources, they are not subject to any kind of prudential regulation. They can, and do, blow up. More speculative investment vehicles may be highly [[Vega|geared]] and quite ''likely'' to blow up. | |||
==Enter the swaps== | ==Enter the swaps== | ||
The [[swap history|history of swaps]] is interesting and fairly well-documented. It all started in earnest with a bright idea [[Salomon Brothers]] had to match up IBM, who needed U.S. dollars but had a load of Swiss francs and Deutschmarks, with the World Bank, which had all the dollars anyone could need but needed to meet obligations in CHF and DEM which it wasn’t able to borrow. The two institutions “swapped” their debts, exchanging dollars for the European currencies and paying coupons on them, with an agreement to return the the same values of the respective currencies at maturity. | The [[swap history|history of swaps]] is interesting and fairly well-documented. It all started in earnest with a bright idea [[Salomon Brothers]] had to match up IBM, who needed U.S. dollars but had a load of Swiss francs and Deutschmarks, with the World Bank, which had all the dollars anyone could need but needed to meet obligations in CHF and DEM which it wasn’t able to borrow. The two institutions “swapped” their debts, exchanging dollars for the European currencies and paying coupons on them, with an agreement to return the the same values of the respective currencies at maturity. | ||