RepoClear Hikes Portuguese, Irish Bond Margins Yet Again

Tyler Durden's picture

Time to push out even more cash bond shorts:

From LCH.RepoClear

In accordance with the Sovereign Credit Risk Framework and in response to the yield differential of 10 year Portuguese government debt and 10 year Irish government debt against a AAA benchmark, LCH.Clearnet Ltd has revised the risk parameters for Portuguese and Irish government bonds cleared through the RepoClear service.  The additional margin required for positions of Portuguese government bonds will consequently be increased to 65% for long positions.  The additional margin required for positions of Irish government bonds will be increased to 75% for long positions. These amounts will be adjusted for the current bond price*.  Short positions will pay a proportionately lower margin.

   1. This decision is based solely on publicly available yield spread data and in no way represents a forward looking market view. LCH.Clearnet will continue to monitor yield spreads closely and keep the parameters under close review in accordance with the Sovereign Credit Risk Framework.
   2. The additional margin will be reflected in a margin call on Tuesday 14 June 2011.
   3. For further information please contact either Tom Chapman ( +44 (0)20 7426 6338 or Lianne Arnold ( +44 (0)20 7426 7376

Chris Jones
Executive Director and Head of Risk Management

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SheepDog-One's picture

The more I study bonds the less sense they make. I wouldnt buy anyones debt myself.

And isnt this how the whole house of cards fell in the first place? All the banks bundling and selling debt and then creating derivative packages on it and all that crap? Oh well, I guess when it all falls apart, the obvious answer is do the same thing over again, this time just more forcefully and blindly.

PaperBear's picture

The margin for long positions is different to the margin for short position.

Does this make sense to anyone ?

oogs66's picture

not at these prices certainly....

margins should cover normal volatility and for bonds a gap risk for bonds is actually generally more of a problem for longs than shorts.  Spanish 10 year government bonds currently trade at about 100 to yield 5.5%.  It seems unlikely that the bonds will gap up 20 points to trade at 120 and yield 3.1%.  It seems more likely a credit problem hits and they drop 20 points.  That is my bias, but bonds trading near par have more downside risk than upside risk, and this is particularly true for shorter dated bonds.


For bonds such as portugal and ireland, the potential upside is arguably fairly high as well, so it is surprising that the exchanges have lower margin - though they are exchanges and might just not be thinking


the other issue/problem is that the margins are usually expressed as a % of investment rather than % of notional.  So a bond trading at 70 with a 50% margin requirement, has the same margin as a % of notional as one trading at par with a 35% margin requirement.  To me, bond margins should be based on face rather than price.  They aren't, but it is one reason they raise margins as bonds decline in price.  The other reason, which is dumb, is that they become scared of default and get much more scared of a bond going from 70 to 0, than they ever were of a bond going from 100 to 70 yet, the frequency of bonds going from 100 to 70 is more likely to occur, and typically involves a faster uglier move as more leverage was employed in the market on bonds with such high prices.



Urban Redneck's picture

They are not just exchanges providing leverage to "big day traders", this a part of the basic leverage leverage foundation of the shadow banking system.

Silver Bug's picture

Very odd. It is almost like they are beginning to eat their own. This always seems to happen in history, when the proverbial you know what is about to hit the fan.

Jack Sheet's picture

Waiting for Skynet to follow suit.,...

CheapKUNGFU's picture

hey Tyler, can someone splain this to me?

is this not newsworthy?

oogs66's picture

I think Tyler posted that decision earlier.  From my understanding, this was a pretty clear case of non voluntary restructuring.  In any case market wasn't shocked and it doesn't seem to be affecting prices in Europe much.  Europe is being affected much more by growing concern that Germany seems willing to let Greece go.

Temporalist's picture

S&P downgrades Greece to CCC.  Debt restructure may result in one or more defaults.