Friday, April 1, 2011

collateral risk, repo, margin call

Repo are sometimes open-ended, but overnight repo is most common. Overnight repo requires automatic (not semi-manual like in BofA) processing.


Margin call is usually daily, but can be intra-day. I don't think there's monthly margin call.

Collateral system supports mostly 3 main instruments - futures, options and repo

--Funding efficiency?
Q: If I have a combined 50b portfolio and I want to repo it with various lenders to borrow cash, then how much cash can I get?

A: depends on my asset "distribution". Diversification -- good; A few highly concentrated positions -- bad. Why? If we pledge a gigantic 10% of IBM Corp's entire outstanding shares as a single collateral, then lender worries about worst case i.e. borrower default. Lender must liquidate, but selling so many IBM shares means huge market impact.

--repo -- Both cash-lender and cash-borrower need to worry about counter-party credit .
If borrower's security appreciates while on loan, then borrower is at risk of loss if lender goes bankrupt while holding the security. The security we have lost is worth more than the cash we borrowed -- we pledged too much

If collateral depreciates, obviously lender is at risk.

--bofa vs ML cultural difference
Bank is more control, more paper work and more red tapes. Brokerage is more efficient.

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