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When variation margin attacks: Difference between revisions
When variation margin attacks (view source)
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Any of the standard reference works<ref>Goldsmith, Armitage & Berlin, ''Teach Yourself Law'', Book IV; The Open University Criminology Course; The ''Perry Mason Book For Boys'', 1962, [[Aleebee|needless to say]].</ref> will tell you that variation margin is a good thing, apt for ridding the world of the kinds of systemic risk that have the habit of building up in the financial system. | Any of the standard reference works<ref>Goldsmith, Armitage & Berlin, ''Teach Yourself Law'', Book IV; The Open University Criminology Course; The ''Perry Mason Book For Boys'', 1962, [[Aleebee|needless to say]].</ref> will tell you that variation margin is a good thing, apt for ridding the world of the kinds of systemic risk that have the habit of building up in the financial system. | ||
==Once upon a time== | |||
{{quote|''Shares of ViacomCBS closed down 9% Tuesday, a day after the company said it would raise $3 billion from stock offerings. ViacomCBS said it will sell $2 billion in class B common shares and $1 billion in Series A mandatory convertible preferred shares. The stock offerings come just a few weeks after the company launched its Paramount+ streaming service, and the offerings will help the company bulk up its content. ViacomCBS said it would use the funds to power “investments in streaming,” among other general corporate purposes.'' | |||
:—CNBC, March 23, 2021}} | |||
[[File:Archegos Positions.png|300px|thumb|left|When [[variation margin]] attacks]]{{archegos capsule}}[[Archegos]] is the story of a fund which took synthetic positions [[Margin loan|on margin]] in on four comparatively [[Illiquidity|illiquid]] stocks — ViacomCBS, Tencent Music Entertainment, Baidu Inc and Vipshop — in sufficient size as to push up their market prices. As their valuations increased, so did Archegos’ [[net equity]] with its [[prime broker]]s. Archegos systematically used the value of that equity to double down on its investments, pushing the stock further up. The further up the stock went the fewer participants were active, meaning total trading volume dropped, off, and [[Archegos]] became ever larger part of the market. By 22 March, Archegos’ Viacome position had a gross market value of USD5.1bn. Since Archegos was trading synthetically, it may not have been apparent that to ViacomCBS that there was only one buyer in town.<ref>{{credit suisse archegos report}} Not understanding this, in a cruel irony ViacomCBS concluded that market sentiment would support a capital raising, duly launched a USD3bn share offering, which there was only one potential buyer — Archegos — and it was tapped out of fresh equity. The capital raising failed, and all hell broke loose. | |||
==Back up, back up: banking, in the good old days== | ==Back up, back up: banking, in the good old days== | ||
===Remember when trusted intermediaries were a thing?=== | ===Remember when trusted intermediaries were a thing?=== | ||
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*This is the other thing. Even if, at inception, it was a fair trade: I lend you Swissies and you lend me an equivalent amount of dollars at today’s exchange rate, should that exchange rate move — is inevitably it will — the respective values of the currencies to be returned at maturity (and the coupons due in the mean time) mean that the contract can quickly resemble indebtedness. Say CHF and USD were at parity when we struck our $10m swap. If CHF drops to 50% of the value of USD, then the counterparty paying dollars effectively owes $5m to the one paying CHF. If, tomorrow, CHF rallies 100% and USD drops 50%, tomorrow the indebtedness will be the other way around. Both therefore had significant contingent credit risk to the during the life of the transaction. | *This is the other thing. Even if, at inception, it was a fair trade: I lend you Swissies and you lend me an equivalent amount of dollars at today’s exchange rate, should that exchange rate move — is inevitably it will — the respective values of the currencies to be returned at maturity (and the coupons due in the mean time) mean that the contract can quickly resemble indebtedness. Say CHF and USD were at parity when we struck our $10m swap. If CHF drops to 50% of the value of USD, then the counterparty paying dollars effectively owes $5m to the one paying CHF. If, tomorrow, CHF rallies 100% and USD drops 50%, tomorrow the indebtedness will be the other way around. Both therefore had significant contingent credit risk to the during the life of the transaction. | ||
Roll forward twenty years and derivative trading had become a twenty billion dollar industry. | Roll forward twenty years and derivative trading had become a twenty billion dollar industry. | ||
{{Sa}} | |||
*[[Archegos]] | |||
{{ref}} | |||