The last few days have seen a spike in volatility in the market. This is mainly due to the market expectations ahead of the Fed, renewed growth worries leading to a drop in oil and more recently, currency devaluation from China.
This volatility not only affects the portfolio’s profit and loss (PnL), but also drags the return from a margin and collateral perspective.
Cassini’s analysis on how such volatility drags the return is twofold;
- As market volatility increases, the cost of collateral inevitably increases. This puts an elevated demand on high quality liquid assets (HQLA), and subsequently makes funding more expensive.
- With increased volatility, clearing houses progressively adjust the margin – due to volatility scaling – and as such, margin can change even for a constant portfolio.
Research by the Cassini team suggests some interesting findings for margin change over the period of 26th July – 5th August:
- Margin at some of the most liquid contracts on CME (2y, 5y and 10y T-Notes) increased by 9-14%.
- Margin for a 30y USD swap under SIMM increased by 6% – not because the margin rates have changed but the inherent risk of the underlying has changed.
Understanding how your margin changes on a day to day basis can profoundly help in managing liquidity concerns. At Cassini, we are always at the forefront of helping our clients, and such monitoring is increasingly being used by our client base.