collateral management

 Margin & Collateral Management

Margin requirements are the good faith deposit (or performance bond) each counterparty posts with a clearinghouse against open positions.  Margin is the term used by exchanged traded clearinghouses while Collateral is the term used by Central Clearing Counterparties.

The Difference?

A cleared derivative trades on an SEF (or via phone, etc.) and clears at a CCP (clearinghouse).  SEE MENU ITEM CLEARED DERIVATIVES

A bilateral contract trades OTC  either by phone and is not submitted to a CCP.  SEE MENU ITEM BILATERAL DERIVATIVES

 

CLICK HERE FOR FULL LIST OF HAIRCUTS, INITIAL MARGIN & A CHEAT SHEET CONTRASTING BILATERAL & CLEARED SWAPS.

 

FOR CLEARED DERIVATIVES: Each exchange will have their own:

List of eligible collateral

Haircut (% of collateral held aside to account for price fluctuations in collateral)

Initial margin requirements

You can find information for the Swaps CCP on the sidebar links below entitle Margin And Collateral Links

 

FOR BILATERAL DERIVATIVES: The BIS, CFTC/SEC IOSCO, et al have made suggestions for:

List of Eligible Collateral

Haircut (% of collateral value held aside to accommodate price fluctuations and minimize collateral transfers)

% of notional required (Initial Margin)

 

MARGIN EXAMPLE (COLLATERAL & HAIRCUT):

On Trade Date:

Submission to CCP:  $100 million notoinal amount PAYING FIXED on 5 year interest rate swap @ 1.25%

Eligible Collateral:   US Treasury maturing in 3 years, currently trading at 100  (no accrued interest due)

Collateral Haircut:   5%

Initial Margin         10% of notional amount

Initial Margin          $10 million    ($100 million notional amount * 10%)

Collateral amount:  $10 million /(1-.05)] = $10.53 million

DV01 = $46,000  (if rates rise 1 bp – pay fixed swap will MAKE ~ $46,000 on $100 million notoinal)

 

on Trade Date + 1

5 year swap closes at 1.30% + 5 bps

$46,000 * 5 bps = $230,000 Profit due to Pay Fixed side of swap

The counterparty RECEIVING fixed must post an additional $230,000 in collateral

The CCP will credit your account $230,000

Counterparty posts same US Treasury maturing in 3 years haircut = 5%

P & L posting = $242,100     [$230,000/(1-.05)]

CCP transfers collateral to PAYER’s Clearing Account

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