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When variation margin attacks: Difference between revisions
When variation margin attacks (view source)
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*Note the role of banks here is not to take a proprietary position in the businesses to which they lent, or the investments which those businesses made, but to manage their credit exposure on their assets, ensure their deposits funded the business, and to make sure the margin between deposits and loans was enough to remain solvent. | *Note the role of banks here is not to take a proprietary position in the businesses to which they lent, or the investments which those businesses made, but to manage their credit exposure on their assets, ensure their deposits funded the business, and to make sure the margin between deposits and loans was enough to remain solvent. | ||
===Interbank relationships=== | ===Interbank relationships=== | ||
There is, and always has been, a healthy interbank relationship, providing liquidity, custody, making markets, foreign exchange, hedging and providing each other short term funding to help manage their daily operations. These interbank relationships tend to be wide and many-faceted and the terms documenting them tended to be short | There is, and always has been, a healthy interbank relationship, providing liquidity, custody, making markets, foreign exchange, hedging and providing each other short term funding to help manage their daily operations. These interbank relationships tend to be wide and many-faceted and the terms documenting them tended to be short to non-existent, and bilateral. | ||
===The overall vibe=== | ===The overall vibe=== | ||
The overall | The overall vibe of the financial system was of circumspect, self-imposed ''prudence'': institutions, staffed by Captain Mainwarings provided stodgy, unflamboyant services to clients who were grateful to be offered them, and who would produce sureties for their investments. | ||
The idea here is to set up an idea of a financial services industry with two types of participant: ''intermediaries'' and ''end users''. We have waxed [[Look, I tried|elsewhere]] about the countless ways enterprising individuals can contrive to interpose themselves into a process that oughtn’t to need ''that’’ much intermediating, but let us, for today’s outing, take it as we find it. | |||
==== Intermediaries ==== | ==== Intermediaries ==== | ||
There are various types of intermediary in the market: those that are part of the market infrastructure, like [[Exchange|stock exchange]] | There are various types of intermediary in the market: those that are part of the market infrastructure, like [[Exchange|stock exchange]]s, [[clearing system]]s, securities depositories and so on; then those [[Agent|agents]] who earn only a [[commission]] from their involvement, and take no [[principal]] risk<ref>I include here “[[quasi-agent]]” roles that are conducted on a [[riskless principal]], but (absent insolvency) are economically neutral: thse participants are remunerated by [[commission]] or fixed [[mark-up]] and do not have “[[Skin in the Game: Hidden Asymmetries in Daily Life - Book Review|skin in the game]]”.</ref> at all: [[Cash brokerage|cash broker]]<nowiki/>s, [[Investment manager|investment managers]], [[Clearing broker|clearer]]<nowiki/>s, [[Market-maker|market-makers]] and [[Intermediate broker|intermediate brokers]]; and then there are those who ''do'' take principal risk, but only by lending to the end users, and again don’t participate in the upside or downside<ref>Barring through “gap loss” where, due to portfolio losses, the customer is insolvent and cannot repay its loan.</ref> of the investments they are financing. In all cases the thing they have in common is that their financial interest is independent of the performance of the instruments in which they are dealing. | ||
The interesting case is the [[swap dealer]]: being a counterparty to a [[derivative]] contract, a [[swap dealer]] is the other side of the trade to its customer and therefore, nominally, fully exposed to the [[underlier]]’s performance. However, [[swap dealer]]<nowiki/>s are generally [[Delta-hedging|delta-hedged]] and in many cases are prohibited by regulation from taking proprietary positions.<ref>This is the famous “Volcker Rule”.</ref> | The interesting case is the [[swap dealer]]: being a counterparty to a [[derivative]] contract, a [[swap dealer]] is the other side of the trade to its customer and therefore, nominally, fully exposed to the [[underlier]]’s performance. However, [[swap dealer]]<nowiki/>s are generally [[Delta-hedging|delta-hedged]] and in many cases are prohibited by regulation from taking proprietary positions.<ref>This is the famous “Volcker Rule”.</ref> | ||