Banks turn to synthetic derivatives to cut initial margin
Options-based instruments can halve initial margin for some non-cleared products, say dealers
At least two dealers have turned to so-called synthetic derivatives to reduce the initial margin (IM) required for their interest rate and foreign exchange portfolios, with estimated margin savings of up to 50% on some positions.
New margin rules require large dealers to post initial margin against new non-cleared derivatives positions. This has created a problem for the trading of instruments such as swaptions, which are non-cleared but hedged with cleared swaps.
Under the industry’s agreed
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