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Not toxic, just “lazy”

A short article in Risk magazine details a new practice amongst some of the larger swap dealers, of posting so-illiquid-as-to-be-solid assets as initial margin; Risk quotes the banks involved as putting “lazy” assets to work. Banks sign bilateral agreements with each other, arranging to post a static portfolio of assets to a third-party account. The arrangement is typically of minimum 12 month duration and the assets are a combination of RMBS, CMS and peripheral European bank debt. These “assets”, too illiquid for the repo market, are effectively earning a return by significantly lowering a bank’s stated RWA for derivatives trading.

These voluntary agreements pre-empt the phase-in of CRD IV initial margin regulations in January 2015, and the WGMR rules are clear that only liquid assets will be eligible as collateral.  This practice may result in a short-term and soon to be redundant gain; however, banks may think their time better spent in preparing to thrive under the new regulations, than micro-finessing the transition period between the old and the new.

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