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When variation margin attacks: Difference between revisions
When variation margin attacks (view source)
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Since, like Captain Redbeard Rum, your loyal contrarian is going to run against what all the other captains will tell, you, let me set the scene with a story. | Since, like Captain Redbeard Rum, your loyal contrarian is going to run against what all the other captains will tell, you, let me set the scene with a story. | ||
==Once upon a time== | ==Once upon a time in America== | ||
{{quote|''Shares of ViacomCBS closed down 9% Tuesday, a day after the company said it would raise $3 billion from stock offerings. 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.'' | {{quote|''Shares of ViacomCBS closed down 9% Tuesday, a day after the company said it would raise $3 billion from stock offerings. 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}} | :—CNBC, March 23, 2021}} | ||
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Now here is an interesting thing. Because [[Archegos]] gained their market exposure using [[Equity derivatives|swaps]], ''by regulation'', their brokers were ''obliged'' to pay the value of their net equity to them, every day, in the form of [[variation margin]]. To be sure, [[VM]] is typically paid into an account with the broker, and net equity takes initial margin into account — [[initial margin]] is another story altogether — that cash balance, over required initial margin, is available to be drawn down on request. | Now here is an interesting thing. Because [[Archegos]] gained their market exposure using [[Equity derivatives|swaps]], ''by regulation'', their brokers were ''obliged'' to pay the value of their net equity to them, every day, in the form of [[variation margin]]. To be sure, [[VM]] is typically paid into an account with the broker, and net equity takes initial margin into account — [[initial margin]] is another story altogether — that cash balance, over required initial margin, is available to be drawn down on request. | ||
''This is very different from cash margin lending''. Had Archegos put the equivalent ''physical'' positions on, using [[margin loan]]s, its brokers would ''not'' have ''had'' to advance it the cash value of its net equity. They may well have done so, of course – but the right to gracefully decline is a powerful thing. While lending on margin against net equity is how [[prime broker]]s make their money, there are times when you might want to pull in the horns. Especially if — as, per the chart — your client’s positions in thinly traded stocks have rallied enormously against the rest of the market. What goes up must come down; what goes up ''quickly'' tends to come down ''even more quickly''. | ''This is very different from cash margin lending''. Had Archegos put the equivalent ''physical'' positions on, using [[margin loan]]s, its brokers would ''not'' have ''had'' to advance it the cash value of its net equity. They may well have done so, of course – but the right to gracefully decline is a powerful thing. While lending on margin against net equity is how [[prime broker]]s make their money, there are times when you might want to pull in the horns. Especially if — as, per the chart — your client’s positions in thinly traded stocks have rallied enormously, inexplicably, against the rest of the market. What goes up must come down; what goes up ''quickly'' tends to come down ''even more quickly''. And so it transpired | ||
Even in the | Even in the | ||