82,892
edits
Template:M intro isda Party A and Party B: Difference between revisions
Template:M intro isda Party A and Party B (view source)
Revision as of 16:41, 11 December 2023
, 11 December 2023→On the case for one-way margin
Amwelladmin (talk | contribs) |
Amwelladmin (talk | contribs) |
||
| Line 98: | Line 98: | ||
Is that the sound of [[Lehman]] [[horcrux]]<nowiki/>es sparking up I hear? | Is that the sound of [[Lehman]] [[horcrux]]<nowiki/>es sparking up I hear? | ||
==== Fixed/floating swaps ==== | |||
But are [[synthetic equity swap]]<nowiki/>s an odd use case? Are other kinds of swaps more bilateral, and less “lendy” in nature? What about interest rate swaps? Surely ''paying'' a fixed rate and ''receiving'' a floating rate isn’t ''loansome''?<ref>Are you ''loansome'' tonight?</ref> | |||
Again, the key is to consider the respective parties’ economic positions before and after trading. The customer | The first point to make here is that in the real universe, ''fixed or floating rate cashflows do exist independently. They always come attached to an asset of some kind''. They are the ''return'' of an investment. In the normal, non swappist world, to get exposure to a rates is to buy a whole principal investment. If you want a floating rate, you put down a hundred bucks and buy a floating rate note. It was only once the [[Children of the Woods|Children of the Forest]] wrought their wristy magic on the [[First Men]] as they fought through the dark [[Bretton Woods|Woods of Bretton]] that the Ways of the [[Single agreement|Single Agreement]] came into common understanding. | ||
A swap can have disembodied fixed and floating rates only because, when set against each other, the principal investments they would normally be attached to ''cancel each other out''. The principal investments are there, but they are just ''assumed''. | |||
Again, the key is to consider the respective parties’ economic positions before and after trading. The customer does change its net position; the [[dealer]] does not. Swapping a fixed cashflow for a floating one is to ''keep'' the “asset” that funds that cashflow (which logically must be a “fixed-rate asset”), and to acquire a new floating-rate asset in the same principal amount. This is also the principal amount of the implied loan the customer must take out to acquire the floating-rate asset. That being the case, the principal of the floating-rate asset cancels out against the principal of the loan, and the customer left with just the floating rate cashflows, for which it must pay the fixed rate it has agreed. The customer’s position is the present value of the floating rate it has bought minus the present value of the fixed rate of its financing. | |||
Without a loan, the customer would have to sell its whole fixed-rate asset and use the proceeds to buy a floating-rate bond from the dealer. That is, pay the principal amount to the dealer, and acquire the interest and principal cashflows of a floating rate asset. Here the customer is not borrowing anything. | Without a loan, the customer would have to sell its whole fixed-rate asset and use the proceeds to buy a floating-rate bond from the dealer. That is, pay the principal amount to the dealer, and acquire the interest and principal cashflows of a floating rate asset. Here the customer is not borrowing anything. | ||
| Line 111: | Line 114: | ||
Quite so: but that is the nature of a floating-rate bond. It ''is'' a loan. But it is ''not a loan to the dealer''. It is a loan to the issuer of the floating-rate bond. If the dealer is paying you the return of a floating-rate bond you may be assured it has used your money to buy a floating-rate bond, to hedge itself. You have not, net, lent the dealer ''anything''. | Quite so: but that is the nature of a floating-rate bond. It ''is'' a loan. But it is ''not a loan to the dealer''. It is a loan to the issuer of the floating-rate bond. If the dealer is paying you the return of a floating-rate bond you may be assured it has used your money to buy a floating-rate bond, to hedge itself. You have not, net, lent the dealer ''anything''. | ||
=== On the case for one-way margin === | |||
In recent years — ironically, just as the “dealer” vs “customer” dynamic has become more pronounced<ref>After the [[GFC]], bank proprietary trading fell away to almost nothing.</ref> — the global regulatory-industrial complex,<ref>This label is not just sardonic: there really is a cottage industry of of “regulatory change management professionals”, in-house and out, who owe their last decade’s livelihood to ''accommodating'' quixotic regulatory initiatives like this. They are a powerful lobby with a direct interest in maintaining the rate of regulatory churn.</ref> still fighting last decade’s war, forged rules which overlook this plain asymmetry. Notably, the coordinated worldwide approach to bilateral [[regulatory margin]]. As swap positions move in and out of the market, counterparties must post each other the cash value of the net market movements each day. This is a little like closing positions out at the end of each day and settling up, with a key difference: you ''don’t'' close out your positions. The valuations at which the parties exchange margin are guesstimates. The parties stay on risk. | In recent years — ironically, just as the “dealer” vs “customer” dynamic has become more pronounced<ref>After the [[GFC]], bank proprietary trading fell away to almost nothing.</ref> — the global regulatory-industrial complex,<ref>This label is not just sardonic: there really is a cottage industry of of “regulatory change management professionals”, in-house and out, who owe their last decade’s livelihood to ''accommodating'' quixotic regulatory initiatives like this. They are a powerful lobby with a direct interest in maintaining the rate of regulatory churn.</ref> still fighting last decade’s war, forged rules which overlook this plain asymmetry. Notably, the coordinated worldwide approach to bilateral [[regulatory margin]]. As swap positions move in and out of the market, counterparties must post each other the cash value of the net market movements each day. This is a little like closing positions out at the end of each day and settling up, with a key difference: you ''don’t'' close out your positions. The valuations at which the parties exchange margin are guesstimates. The parties stay on risk. | ||
| Line 150: | Line 153: | ||
===Voluntary margin=== | ===Voluntary margin=== | ||
Now, none of this stops a dealer recognising the “equity” in a customer’s unrealised [[mark-to-market]] gains and lending against it. This is what [[Margin lending|margin lenders]] and physical prime brokers do every day of the week. But this kind of lending is ''discretionary''. Dealers don’t have to do it, and if they do, they can apply whatever [[haircut]]<nowiki/>s, credit terms and diversification criteria they like. | Now, none of this stops a dealer recognising the “equity” in a customer’s unrealised [[mark-to-market]] gains and lending against it. This is what [[Margin lending|margin lenders]] and physical prime brokers do every day of the week. But this kind of lending is ''discretionary''. Dealers don’t have to do it, and if they do, they can apply whatever [[haircut]]<nowiki/>s, credit terms and diversification criteria they like. | ||
As a customer’s unrealised profit increases in value, you would expect the dealer’s lending appetite to diminish. But regulatory VM rules ''force'' the dealer to lend in full, and in cash. Imagine if retail banks were forced to cash collateralise mortgage customers the value of unrealised gains on their properties! | As a customer’s unrealised profit increases in value, you would expect the dealer’s lending appetite to diminish. But regulatory VM rules ''force'' the dealer to lend in full, and in cash. Imagine if retail banks were forced to cash collateralise mortgage customers the value of unrealised gains on their properties! | ||