When variation margin attacks: Difference between revisions

When variation margin attacks (view source)

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 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.
+''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 being ''able'' to lend money, and being ''obliged'' to lend money are quite different propositions on that special day when it seems the world is going to hell.<ref>It is fair to note that — with the possible exception of the vampire squid — [[Archegos]]’s brokers did ''not'' believe the world was going to hell, at least not until it was far too late. But the principle remains.</ref>
-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.
+=== A dissonance ===
+So there is this [[dissonance]], between [[Cash prime brokerage|''physical'' prime brokerage]], where advancing cash against net equity is at the broker’s discretion — oh, sure, you have withdraw your equity at any time, but you have to take it [[Payment in kind|in kind]]<ref>Withdrawing [[net equity]] in the form of the [[shares]] themselves, rather than their [[cash]] value, has a very different effect on the [[prime broker]]’s risk profile. It makes the client’s portfolio ''less'' volatile; withdrawing [[cash]] makes it ''more'' volatile.</ref> — and [[Synthetic prime brokerage|''synthetic'' prime brokerage]], where cash payment is required by regulation. It is inevitable for clients and their [[Buy-side legal eagle|advisors]] to ask, “well, if I can withdraw my equity value in cash under a swap, why can’t I have it in cash for my physical portfolio under a margin loan?”
-Even in the
+On its face, this is a fair question, to which the answer is either: “Huh. I hadn’t thought of that. Yes, I suppose you are right” — call this the all other captains argument; or: “Well that just goes to show what a misconceived idea compulsory two-way variation margin is” — call this the Captain Redbeard Rum argument.
-But anyway, we are getting ahead of ourselves.
+“Come on,  JC: I know you are a cranky old bugger. But do you really mean to say you are going to swim against the tide of all that consensus?”
-==Back up, back up: banking, in the good old days==
+WHY NOT, my friends? Someone hold my beer.
+==Banking, in the good old days==
 ===Remember when trusted intermediaries were a thing?===
 *Banks are these trusted intermediaries that make finance available to people who need it to run their businesses.
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 {{Sa}}
+* [[Variation margin]]
 *[[Archegos]]
+*[[Swap history]]
 {{ref}}