Raised initial margins for

Initial margin clearing house

Will the IOSCO margin rules for uncleared swaps put derivatives investors active in that market on a collision course with their broker/dealers? Requirements for higher initial margin are almost certainly coming down the pike and the cost of an uncleared swap will rise. Using 10 day liquidation assumptions will be more onerous than many investors would otherwise face and certainly higher than cleared swaps. But is there a better way?

“…The head of global markets at a major bank sounded a similar warning. ‘If the proposed initial margin requirements are implemented, then the cost to trade more illiquid derivatives like long-dated inflation swaps will be so huge will that it will be very difficult for dealers to stay in this business, ’ he said…” and “…’More significantly, it will become very difficult for clients to hedge, especially those with large, one-way exposures like UK pension funds’, he added…”

And the “pro-cyclical” card has been played too. The article quoted Fred Janbon, global head of fixed income at BNP Paribas:

“…There is a danger the initial margin rules could be very pro-cyclical. As you enter a crisis and markets get more volatile, initial margin posting will increase massively: US$1trn could quickly turn into US$3tr…. This will force deal unwinds, which in itself could precipitate a crisis.”

Initial margin, like repo haircuts, have always been pro-cyclical. More volatile markets result in bank credit officers requiring more cushion. Starting out with higher initial margin when a swap is uncleared and, by definition, less liquid, seems difficult to argue against. Forced unwinds will create havoc, but won’t higher IM mean the banks stand a chance to have less exposure should they come? Is the logical next step of the argument not to collect higher initial margin (or VM) when volatility is higher? We hope not.

But is there a way to make everyone happy? Christopher Whittall buried the lead when he wrote at the very end of the article:

“…Perhaps more significantly, industry insiders point to preliminary work on a concept known as “net initial margin risk”. This would involve building an institution similar to a central clearing house for collateral for uncleared swaps.

This means that if Firm X entered an uncleared swap with Firm Y, which then did an offsetting trade with Firm Z, collateral could be posted to a central hub that would allow the exposures to be netted down rather than all three firms having to post collateral on a gross basis.

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Shipping by airmail from UK: items normally reach US addresses within a few days but can take longer THE STOCK EXCHANGE: The clearing House. London, antique print c1880
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  • Caption below print: The clearing house
  • Condition: Good; suitable for framing. However, please note: Verso text quite apparent in margin; The image shown may have been taken from a different example of...
  • Size: 14.0 x 14.0cm, 5.5 x 5.5 inches (Small)
  • Type & Age: Year printed c1880. Antique wood engraved print
  • Verso: There are images and/or text printed on the reverse side of the picture which are likely to show through the page to some extent because the paper is quite...
Shipping by airmail from UK: items normally reach US addresses within a few days but can take longer LONDON: Clearing House, Lombard St, antique print, 1847
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  • Caption below print: The Clearing-House, in Lombard-Street
  • Condition: Good; suitable for framing. Please check the scan for any blemishes prior to making your purchase.
  • Size: 14.5 x 23.5cm, 5.75 x 9.25 inches (Medium)
  • Type & Age: Year printed 1847. Antique wood engraved print
  • Verso: There are images and/or text printed on the reverse side of the picture. In some cases this may be visible on the picture itself (please check the scan prior...

Popular Q&A

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Where can I find margin requirements of CME?

I need to know margin requirements of gold and silver futures in CME, Thus I need official link to the list of margin requirements. I searched the web and CME website, but I could not find it. Please help

This list is about 39 pages, so it's easier to click on "Download Data" then do a search (Ctrl-F) for what you want in Excel.
PRODUCT NAME INITIAL MAINT.
E-MINI SILVER FUTURES 3375.00 2500.00
COMEX MINY GOLD FUTURES 4556.00 3375.00
Your broker will have their own set of margin requirements.

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