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When variation margin attacks: Difference between revisions
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Customers, of course, ''do'' have skin in the game: they take all the benefits — less their intermediaries’ fees, commissions and financing costs of course — 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. | Customers, of course, ''do'' have skin in the game: they take all the benefits — less their intermediaries’ fees, commissions and financing costs of course — 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. This is where intermediaries have some tail risk: if the customer has blown up, the intermediary loses anything it is still owed. | More speculative investment vehicles may be highly [[Vega|geared]] and quite ''likely'' to blow up. This is where intermediaries have some tail risk: if the customer has blown up, the intermediary loses anything it is still owed. Investment funds have ''no'' capital buffer. When they gap through zero, their counterparties absorb ''all'' their market risk, despite wishing to have none of it. [[Broker]]s, banks and and [[dealer]]s ''do'' have a capital buffer, and if their clients’ positions gap through zero, can usually absorb losses, as Archegos’ [[prime broker]]s ably proved. | ||
But in any weather, up until the early 1980s, you were either a customer or an intermediary and the above was all quite well settled. But innovations in the market, technology and regulation began to change things. | But in any weather, up until the early 1980s, you were either a customer or an intermediary and the above was all quite well settled. But innovations in the market, technology and regulation began to change things. | ||