When variation margin attacks: Difference between revisions

When variation margin attacks (view source)

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 :—CNBC, March 23, 2021}}
 {{archegos capsule}}
-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, 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
+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, the broker usually pays [[VM]] into an account it runs for its client. There are withdrawal thresholds that apply to that account that takes into account required [[initial margin]] — oh, that’s another story altogether — but over those thresholds all the variation margin is the client’s money, available to be withdrawn on request.
+This is completely normal in the world of latter-day derivatives: mandatory two-way exchange of [[variation margin]] was implemented by regulation in pretty much every major market ''in the name of reducing systemic risk'' — but all the same, it is utterly weird. It is like ''forced'' lending against asset appreciation. Imagine if your bank, by law, had to pay you the cash value of any increase in your home’s value over the life of your mortgage.
+''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 ''willingly'' done so, of course –  that is how [[prime broker]]s make their money after all — but there are times when the world is going to hell and it is quite a nice thing to respectfully decline.
+Indications of forthcoming hell: your client’s positions, in thinly traded stocks, rallying 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