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Template:M summ 2018 CSD 13(h): Difference between revisions
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With this provision it looks like the ’squad got to the point of maximum disarray, with all rocks upturned and slaters, bugs and cockroaches scuttling everywhere, and it just had a tantrum and stormed off. These provisions don’t even make ''sense''. They are not even ''grammatical''. | With this provision it looks like the ’squad got to the point of maximum disarray, with all rocks upturned and slaters, bugs and cockroaches scuttling everywhere, and it just had a tantrum and stormed off. These provisions don’t even make ''sense''. They are not even ''grammatical''. | ||
===The basic problem=== | ===The basic problem=== | ||
The problem to be solved is this: [[initial margin]] is designed to cover [[mark-to-market]] [[exposure]] between (usually daily) [[variation margin]] calls. It is usually calculated to cover the likely possible | The problem to be solved is this: [[initial margin]] is designed to cover [[mark-to-market]] [[exposure]] between (usually daily) [[variation margin]] calls. It is usually calculated to cover the likely possible change in portfolio value over that “liquidity period”, given the potential drop in collateral value over the same period. That is, ''one day''. | ||
However, when a counterparty goes ''[[titten hoch]]'', the process of closing it out and determining who is owed what is a long process. For a big complex financial institution, can be months or years. One day’s market move starts to look a little bit meagre. Seeing as the [[initial margin]] is, by regulation, in the shape of non-cash assets, it too is subject to the vagaries of the market and can move up or down. So it might not quite cover what you thought it was going to cover. | However, when a counterparty goes ''[[titten hoch]]'', the process of closing it out and determining who is owed what is a long process. For a big complex financial institution, can be months or years. One day’s market move starts to look a little bit meagre. Seeing as the [[initial margin]] is, by regulation, in the shape of non-cash assets, it too is subject to the vagaries of the market and can move up or down. So it might not quite cover what you thought it was going to cover. | ||