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Template:M summ 2018 CSD 3(c)(iii): Difference between revisions
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, 28 April 2021→The theory of the {{imcsdprov|Margin Approach}}
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===[[Initial margin]] and [[independent amount]]s=== | ===[[Initial margin]] and [[independent amount]]s=== | ||
A common confusion in the {{ | A common confusion in the {{csa}} used to be its use of “{{csaprov|Independent Amount}}” to describe what everyone else in the market colloquially calls [[initial margin]]. Were they the same? Were they different? it was quite difficult on a cold read to say, especially as an {{csaprov|Independent Amount}} ''looks'', in the {{csa}}, like it is meant to function as a distinct amount of standalone credit protection, held without reference to a given {{isdaprov|Transaction}}, but in practice it does not, and is called {{isdaprov|Transaction}}-by-{{isdaprov|Transaction}}.<ref>For a fuller discussion, see {{csaprov|Independent Amount}}.</ref> | ||
Anyway, opportunistically {{icds}} has solved that problem by introducing two kinds of | Anyway, opportunistically {{icds}} has solved that problem by introducing ''two'' kinds of “Margin Amount” in the {{imcsd}}, and giving them ugly parenthetic suffixes: the {{imcsdprov|Margin Amount (IM)}} and the {{imcsdprov|Margin Amount (IA)}}. Maybe someone thought this was a neat trick, I don’t know. It seems a dumb one to me: once everyone knew {{csaprov|Independent Amount}} and [[initial margin]] were, for all intents and purposes, the same; now they are subtly different. | ||
The problem {{icds}} was trying to “solve for” was the swap counterparty who is ''already'' taking [[initial margin]] and wants to keep doing that, its own way, somehow, even now the technocrats have railroaded their way into the room and mandated by regulation their own version [[initial margin]], which you must do ''their'' way. | The problem {{icds}} was trying to “solve for” was the swap counterparty who is ''already'' taking [[initial margin]] and wants to keep doing that, its own way, somehow, even now the technocrats have railroaded their way into the room and mandated by regulation their own version [[initial margin]], which you must do ''their'' way. | ||
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===The theory of the {{imcsdprov|Margin Approach}}=== | ===The theory of the {{imcsdprov|Margin Approach}}=== | ||
Let’s call your existing, pre-regulatory initial margin arrangement your “IA”, and the regulatory requirement “IM”. IA could be more than IM, less than IM, or (unlikely, but let’s say) the same. | Let’s call your existing, pre-regulatory, contractual initial margin arrangement your “IA”, and the regulatory requirement “IM”. IA could be more than IM, less than IM, or (unlikely, but let’s say) the same. Now everyone must post at least IM, so the only realistic scenarios are (i) those who who want extra IA over the regulatory-prescribed IM, and (ii) those who don’t. | ||
The other difference is that ''usually'' you paid your IA directly, and by [[title transfer]], to your counterparty. Since generally dealers would require IM, but customers would not, this had the curious effect of increasing the customer’s credit exposure to the dealer, at the same time it reduced the dealer’s market exposure against the customer. But — and for that very reason, Reg IM you must pay not to your dealer, but to a third-party [[custodian]], subject to a security arrangement and an [[account control agreement]], to avoid exacerbating counterparty credit risk the other way. The regulatory regime is therefore economically not the same as the previous non-regulatory IA regime, as the recipient cannot monetise the regulatory initial margin it receives, or use it elsewhere in its business. This [[reuse]] right is important for those involved in [[margin lending]]. | The other difference is that ''usually'' you paid your IA directly, and by [[title transfer]], to your counterparty. Since generally dealers would require IM, but customers would not, this had the curious effect of increasing the customer’s credit exposure to the dealer, at the same time it reduced the dealer’s market exposure against the customer. But — and for that very reason, Reg IM you must pay not to your dealer, but to a third-party [[custodian]], subject to a security arrangement and an [[account control agreement]], to avoid exacerbating counterparty credit risk the other way. The regulatory regime is therefore economically not the same as the previous non-regulatory IA regime, as the recipient cannot monetise the regulatory initial margin it receives, or use it elsewhere in its business. This [[reuse]] right is important for those involved in [[margin lending]]. | ||
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*'''[[Allocated Margin Flow (IM/IA) Approach - IM CSD Provision|Allocated Margin Flow Approach]]''': you pay the Reg IM portion of the IA under the {{imcsd}}, and pay any excess over that in the IA to the counterparty under the {{imcsdprov|Other CSA}}. To the JC’s way of thinking, this is the only one that makes any sense; | *'''[[Allocated Margin Flow (IM/IA) Approach - IM CSD Provision|Allocated Margin Flow Approach]]''': you pay the Reg IM portion of the IA under the {{imcsd}}, and pay any excess over that in the IA to the counterparty under the {{imcsdprov|Other CSA}}. To the JC’s way of thinking, this is the only one that makes any sense; | ||
*'''[[Greater of Margin Flow (IM/IA) Approach - IM CSD Provision|Greater of Margin Flow Approach]]''': You pay the ''whole'' of the IA (or the IM, if it is greater) under the {{imcsd}} and ''nothing'' under the {{imcsdprov|Other CSA}}. We don’t think the broker will ever give up the right to reuse excess IA by steering that to a third party custodian, and nor, really should the client, since their implied financing rates will surely rise. | *'''[[Greater of Margin Flow (IM/IA) Approach - IM CSD Provision|Greater of Margin Flow Approach]]''': You pay the ''whole'' of the IA (or the IM, if it is greater) under the {{imcsd}} and ''nothing'' under the {{imcsdprov|Other CSA}}. We don’t think the broker will ever give up the right to reuse excess IA by steering that to a third party custodian, and nor, really should the client, since their implied financing rates will surely rise. | ||
===[[Allocated Margin Flow (IM/IA) Approach - IM CSD Provision|Allocated Margin Flow]] is the best bet=== | ===[[Allocated Margin Flow (IM/IA) Approach - IM CSD Provision|Allocated Margin Flow]] is the best bet=== | ||
We think that almost all punters will go for the [[Allocated Margin Flow (IM/IA) Approach - IM CSD Provision|Allocated Margin Flow]] approach as this best deals with the regulatory obligation without ''unduly'' penalising either side or changing the basic economics — though where the {{imcsdprov|Secured Party}} would otherwise be in the [[Rehypothecation|rehypothecation]] game, it ''does'' change the economics ''a bit'' — thus, render unto CESR what is required by CESR;<ref>This was ALMOST an awesome pun. It doesn’t ''quite'' work, seeing as (a) the [[Committee of European Securities Regulators]] was formally disestablished in 2011 and replaced by [[ESMA]]; and (b) you render your Reg IM unto a custodian, not to ESMA (or CESR) anyway. But still, it was close enough to roll the dice on it anyway Hope you like it. {{hawf}}</ref> pay any excess over that to your counterparty. | We think that almost all punters will go for the [[Allocated Margin Flow (IM/IA) Approach - IM CSD Provision|Allocated Margin Flow]] approach as this best deals with the regulatory obligation without ''unduly'' penalising either side or changing the basic economics — though where the {{imcsdprov|Secured Party}} would otherwise be in the [[Rehypothecation|rehypothecation]] game, it ''does'' change the economics ''a bit'' — thus, render unto CESR what is required by CESR;<ref>This was ALMOST an awesome pun. It doesn’t ''quite'' work, seeing as (a) the [[Committee of European Securities Regulators]] was formally disestablished in 2011 and replaced by [[ESMA]]; and (b) you render your Reg IM unto a custodian, not to ESMA (or CESR) anyway. But still, it was close enough to roll the dice on it anyway Hope you like it. {{hawf}}</ref> pay any excess over that to your counterparty. | ||
It leaves one rather arid and academical dispute that one may quickly tire of having, as to whether the excess should be over one’s {{imcsdprov|Credit Support Amount (IM)}} — being the amount one is ''obliged'' to post to the {{imcsdprov|Custodian (IM)}} by way of [[regulatory margin]] — or one’s {{imcsdprov|Posted Credit Support | It leaves one rather arid and academical dispute that one may quickly tire of having, as to whether the excess should be over one’s {{imcsdprov|Credit Support Amount (IM)}} — being the amount one is ''obliged'' to post to the {{imcsdprov|Custodian (IM)}} by way of [[regulatory margin]] — or one’s {{imcsdprov|Posted Credit Support (IM)}} — being the amount one actually ''has'' posted to the {{imcsdprov|Custodian (IM)}} — these may be different if you are in the habit of operational laxity in providing Reg IM or reclaiming it when it is no longer required, or you have just blown up and missed a call — and we consider this further below. | ||