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When variation margin attacks: Difference between revisions
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When variation margin attacks (view source)
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The prime broker may ''agree'' to lend more against that equity — that is the business it is in, after all — but it is not ''obliged'' to. The customer cannot force the broker to lend against the equity. As long as it leaves enough equity in the account the customer may withdraw excess equity, but only by taking the shares it owns. Withdrawing ''shares'' from a prime brokerage account doesn’t fundamentally change ones debtor/creditor relationship. Withdrawing cash ''against'' shares assuredly does. | The prime broker may ''agree'' to lend more against that equity — that is the business it is in, after all — but it is not ''obliged'' to. The customer cannot force the broker to lend against the equity. As long as it leaves enough equity in the account the customer may withdraw excess equity, but only by taking the shares it owns. Withdrawing ''shares'' from a prime brokerage account doesn’t fundamentally change ones debtor/creditor relationship. Withdrawing cash ''against'' shares assuredly does. | ||
Now: because a synthetic swap position looks like a bilateral derivative — okay, okay: ''is'' a bilateral derivative — it is regulated as such, and is in scope for mandatory variation margin. ''Both'' sides are obliged to post [[VM]], every day, where they are [[out-of-the-money]]. Whenever a customer makes any positive return on an [[equity swap]], its swap dealer is, technically, [[out-of-the-money]], and must therefore post [[variation margin]] to the value of that positive return. | |||
This is the equivalent of forcing the swap dealer to lend against equity on a margin loan. It is ''nuts''. To see why it is nuts, let’s return to our old friends at Archegos. | |||
==When variation margin attacks== | |||
in that regard: any positive equity is an unsecured claim against the prime broker. However, traditionally, this credit risk would have been managed by reliance on prudential regulation rather than funded credit mitigation. | |||
The customers entitlement in case of extreme appreciation of its asset would be to transfer a portion of that exposure to a different counterparty there by diversifying its risk. | The customers entitlement in case of extreme appreciation of its asset would be to transfer a portion of that exposure to a different counterparty there by diversifying its risk. | ||