Posting margin for safety wasn’t necessarily a sure thing 20 years ago; will it be useful today?
Twenty years ago amid a number of derivative trade fiascos, regulators, much as they are today, were calling for more oversight of the markets. In particular, they were calling for margin requirements. But as was noted at the time, posting margin doesn’t make the market, or any institution, immune from disaster. Take the misadventures at Barings, which brought the venerated bank down.
Amid the brouhaha, the major exchanges were touting how safe they were. But there was trouble in exchange paradise, as International Treasurer wrote in the March 6, 1995, issue.
“Implicit in much of the regulatory pressure on OTC derivatives markets is a call for more of the safety and oversight provisions present on futures and options exchanges. Indeed, one of the exchanges’ major selling points has been the fact that they force mark-to-market and control disciplines on end-users with their margin requirements and daily cash settlements. The fact that a Barings futures trader was able to lose $1 billion and break the bank despite these safety features leaves their marketing pitch, while still true, sounding flat.”
Today regulators are at it again, this time with the CFTC reproposing margin requirements for financial firms and swap dealers (corporates are exempt… so far). But as iTreasurer wrote recently, citing an ISDA report, requiring margin could tie up trillions of dollars if margin posters overdo it. Further, as the Barings example makes clear, a willful trader or organization can circumvent the checks and balances.