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Rookie_Quant


Total Posts: 741
Joined: Jun 2004
 
Posted: 2017-06-09 20:23
Do margin requirements on different firm's derivatives vary for reasons other than credit rating?

For example, in practice is there often a different margin requirement for CDS of firm A vs B if they are of the same credit quality? Do things like more liquid names matter?

Also, how would you actual traders out there characterize the margin requirements on cash vs synthetic credit risk? Are there any general rules, i/e one more liquid or lower margin than the other?

"These metaphors and similes aint similar to them, not at all." -Eminem

HitmanH


Total Posts: 430
Joined: Apr 2005
 
Posted: 2017-06-11 22:37
In the equity world - there is definitely a margin add on for liquidity - typically based on position size as % ADV

Rookie_Quant


Total Posts: 741
Joined: Jun 2004
 
Posted: 2017-06-20 22:09
Thanks Hitman. A few follow-ups for you/anyone

-does this generalize to other security types? I/e if I wanted to take a cash bond or CDS position in a firm, does the trading volume/liquidity of those securities directly impact my margin costs?

-if the margin cost is a function of both the position size and underlying liquidity, does one effect dominate? That is, if a firm keeps the same position size (in absolute and %AUM) but there is a shock to the liquidity of the underlying equity/bond, will margin costs change dynamically?

If a security suddenly got way MORE liquid, would margin costs adjust downward, or is it more of a ratchet-type effect?

"These metaphors and similes aint similar to them, not at all." -Eminem

Rookie_Quant


Total Posts: 741
Joined: Jun 2004
 
Posted: 2017-08-29 04:12
bump/follow-up question:

does data for cross-sectional variation in margin requirements exist (even if its private/proprietary)?

I know FINRA has some minimum margin rules for things like CDS that appear to be a pure function of spreads, but if I wanted to buy protection on 2 different credits, and say they had the same rating/spread, is it possible I might face different costs of margin?

"These metaphors and similes aint similar to them, not at all." -Eminem

HitmanH


Total Posts: 430
Joined: Apr 2005
 
Posted: 2017-08-29 10:23
Doesn't exist as I know it - although if a counterparty is pitching for the business - they'll then share this typically

HitmanH


Total Posts: 430
Joined: Apr 2005
 
Posted: 2017-08-29 10:23
Doesn't exist as I know it - although if a counterparty is pitching for the business - they'll then share this typically

Rookie_Quant


Total Posts: 741
Joined: Jun 2004
 
Posted: 2017-08-29 17:13
@HitmanH

thanks. So I take it that there is actual cross-sectional variation in margin requirements, but that these are all proprietary and model-driven, and therefore not something attainable for research purposes?

Seems like the rules I've read and after seeing all the back and forth between ISDA and BCBS, whatever internal models are used are likely to be some kind of VaR base, but who knows how many parameters may be involved.

"These metaphors and similes aint similar to them, not at all." -Eminem
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