GMRA A-Z: Cash Margin
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“Cash Margin” is a cash sum paid by the Buyer or the Seller by way of margin. It forms part of the definition of “Margin Transfer” and is a factor in calculating “Net Margin”. Obviously, being regarded as margin, “Cash Margin” is also factored into close-out calculations.
In essence, “Cash Margin” is really a top-up payment which one party makes to its counterparty. This payment is owing because the value of the securities which the Buyer (in other words, the ‘lender’) is holding has changed such that the Buyer is now either ‘under-collateralised’ or ‘over-collateralised’. By making a compensatory cash margin payment the agreed collateral cushion is brought back into balance – extinguishing the “exposure” of the recipient. “Cash Margin” can be paid in the Base Currency or in such other currency as the parties may agree.
Remember – the payment of “Cash Margin” is NOT the same as the amount of the ‘loan’ made by the Buyer to the Seller. Under the GMRA, the ‘loan’ is represented by the “Purchase Price”.
A payment of “Cash Margin” gives rise to a debt. That debt carries interest at the rate the parties agree in Annex I to the GMRA. Why does the transfer of “Cash Margin” give rise to a debt? Well, title to the cash which is actually paid over as “Cash Margin” is actually transferred to the recipient. There is NO grant of a security interest. Therefore the existence of a debt back to the payer must be recognised in order to give the payer comfort and protection. After all, the Cash Margin must be repaid – at the very latest when the trades mature.
In terms of the rate of interest to be paid on Cash Margin, normal practice varies. In relation to a single transaction, it is often the case that the rate of interest to be paid on Cash Margin is the same as the repo rate underlying the actual transaction. However, there is no compelling reason why this should be the case. There are a number of reasons for this:
- “Cash Margin” does not have to be denominated in the same currency as the underlying Repurchase Transaction – in which case it would not be appropriate to use the same interest rate; and
- The margin might have to be returned the next day and so cannot be invested in a way that earns the same amount of interest as the original ‘loan’.
Where multiple transactions have been executed under the GMRA, often in multiple currencies, it becomes even more difficult in practice to identify a single rate of interest that should be paid on Cash Margin. In these circumstances, the rates to be paid are often left to be agreed between the parties and specified in Annex I to the GMRA. Often the specific overnight interest rates for the currencies in question are used.Contact Us