When variation margin attacks: Difference between revisions

Now here is an interesting thing: instead of buying the stocks outright, [[Archegos]] put on its positions using a product called “[[synthetic prime brokerage]]”. Being based on [[Equity derivatives|equity swaps]], [[synthetic prime brokerage]] is caught by [[Regulatory margin|uncleared margin regulations]]. This meant Archegos’ prime brokers were ''obliged'' to pay out realised gains<ref>For [[prime broker]]<nowiki/>s charging “[[dynamic margin]]” this was partly offset by the effect of increased [[initial margin]] required on the inflated value of the position in question; for those charging only a [[static margin]] amount, there was not even that fig-leaf. </ref> or “[[net equity]]” to [[Archegos]], every day, in [[cash]], in the form of “regulatory [[variation margin]]”.  To be sure, prime brokers could impose  thresholds by way of [[initial margin]] — oh, that’s another story altogether — but over those thresholds, variation margin is — at least till the next margin call —the client’s money. It is entitled to withdraw it upon request.  

Now this is all completely normal in the world of latter-day [[Derivative|derivatives]]: regulators mandated [[variation margin]] into pretty much every major market on the planet following the [[global financial crisis]] ''in the name of reducing systemic risk'' — but all the same, in the context of [[Archegos]], it made a bad situation worse. It ''forced'' [[swap dealer]]<nowiki/>s to lend to their client against appreciating assets that were increasingly likely to then ''de''preciate again.

Now had Archegos bought real shares using [[margin loan]]s from its [[prime broker]]<nowiki/>s, they would ''not'' have ''had'' to pay out the cash value any asset appreciation. To be sure, they may well have ''willingly'' done so – margin lending is how [[prime broker]]s make their money, after all — but being ''able'' to lend money, and having to lend it money are quite different propositions, especially on the day the whole world is going to hell.<ref>It is fair to note that — with the possible exception of the vampire squid — [[Archegos]]’s brokers did ''not'' believe the world was going to hell, at least not until it was far too late. But the principle remains.</ref>