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→‎On the case for one-way margin

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 Requiring a dealer to post margin to its customer against the customer’s net in-the-money position makes no sense whatsoever:
-First, customers are trading their capital, dealers are not. Dealers are [[delta-hedge]]d against every customer. They are not “the other side of the trade”. A dealer’s “position” against a given client being “under water” in itself does not change the dealer’s risk of insolvency.  Of course, dealers ''do'' present a risk of insolvency, and customers will have tolerate so much exposure to that risk, but the customer has other levers to manage that risk. They can close out their position, take profits and re-establish the position the new level, for one thing. That enables the dealer to close out its hedge, pass on the hedge gains and reset hedges and initial margin at the higher level. This is not the same has paying the mark-to-market of a unrealised swap. To be sure, customers might not ''like'' to have to do this — realising a gain has tax consequences, sends a market signal and involves stumping up more initial margin — but none of these are good reasons for anyone but the customer concerned.  Giving customers the choice: keep your position open, but keep your money with the bank and live with the solvency risk — encourages prudent behaviour. It incentivises customers to diversify their risk.
+First, customers are trading their capital, dealers are not. Dealers are [[delta-hedge]]d against every customer. They are not “the other side of the trade”. A dealer’s “position” against a given client being “under water” in itself does not change the dealer’s risk of insolvency.  Of course, dealers ''do'' present a risk of insolvency, and customers will have tolerate so much exposure to that risk, but the customer has other levers to manage that risk. They can close out their position, take profits and re-establish the position the new level, for one thing. That enables the dealer to close out its hedge, pass on the hedge gains and reset hedges and initial margin at the higher level. This is not the same has paying the mark-to-market of a unrealised swap. To be sure, customers might not ''like'' doing this — realising a taxable gain and having to stump up more [[initial margin]] when you re-establish the position blows, for sure — but none of these are good reasons for anyone but the customer concerned. Withholding variation margin on profitable positions giving customers the choice: keep your position open and your money with the dealer and live with its solvency risk, ''or book your gain and get your money back and start again — encourages prudent behaviour. If nothing else it incentivises customers to diversify their risk. And it does not automatically lever up the customer’s portfolio. For what do we think the customer will ''do'' with all that free cash VM its dealer keeps sending it?  If it was planning to just sit on it, wouldn’t just — ''leave it at the bank''?
-Secondly, dealers and banks are already capitalised and regulated for systemic risk. There are already constraints on how they must operate, and how much capital they must hold against the contingency of portfolio losses. This capital is, in part, a function of the risk the banks have to their customers. That risk is greatly exaggerated if their clients have to post cash reflecting paper gains their clients have made but not yet realised. You might make the case that this regulation has been similarly ineffective, and some have<ref>Notably  Gerd Gigerenzer, who has tracked the expansion in length of the Basel accords against the persistent rate of bank failure.</ref> but that the regulations don’t work well is hardly the bank’s fault, and nor is it a reason to introduce further rules that will have the effect of undermining then further.
+Secondly, dealers and banks are already capitalised and regulated for systemic risk. There are already constraints on how they must operate, and how much capital they must hold against the contingency of portfolio losses. It holds this capital, in large part, to protect against the risks presented to it ''by its customers''. Customers like thinly capitalised, highly-levered investment funds.
-For this is ''exactly'' what bilateral variation margin does. Capital is the measure of “unallocated cash” available to meet the claims of general creditors. Cash being fungible, ''any'' cash on the balance sheet counts towards the capital ratio. A counterparty facing a bank holding a 100m uncollateralised
+That risk is amplified if dealers must post cash reflecting their clients’ unrealised gains on a derivative portfolio already 70% financed by that very dealer. It's just mad: “Hi. You owe me 70pc of the value of the stock you bought largely with my money, and you want  ''me'' to pay you margin if the stock goes up?
+Now you might make the case that this capital regulation has been a bit of disaster, and some have<ref>Notably Gerd Gigerenzer, who has tracked the expansion in length of the Basel accords against the persistent rate of bank failure.</ref> but one lot of crappy regulations is not a prescription for ''more'' crappy regulations. Especially not when they undermine the first lot.
+And this is ''exactly'' what bilateral variation margin does. Capital is the measure of “unallocated cash” available to meet the claims of general creditors. Cash being fungible, ''any'' cash on the balance sheet counts towards the capital ratio. A counterparty with an uncollateralised paper gain of $100m against a dealer still has a claim to that $100m: it can close out at any time, and even if the dealer fails first ''it still has a claim on that amount from the dealer’s capital reserves''. It is just lining up with other creditors who also have claims.
+===Voluntary margin===
+No-one of this stops the dealer recognising the “equity” in a customer ’s u realised MTM and extending credit — increasing lines— against it. This is what cash prime brokers do every day of the week. But it is discretionary. The dealer can decide where and when to draw its lines.
 For several reasons: