Italy And Spain Spreads Approaching Incremental LCH Margin Collateralization Trigger

Tyler Durden's picture

As both Italian and Spanish bond spreads continue slowly creeping wider toward the half a century territory, we are reminded once again that once both countries pass 450 bps, LCH will automatically hike collateral triggers for both countries, in essence initiating another waterfall effect whereby less cash is released upon repo, requiring more bonds to be pledged, which in turn means other assets have to be sold off to make up for the shortfall, which in turn leads to a sell off of the underlying financial institution (recall that banks in Europe buy their nation's sovereign debt and immediately pledge it back via various repo mechanisms) and so on. What this practically means is that the bond vigilantes now have a far more achievable task in terms of endgoals when it comes to punishing the offending debt, in this case Italy and Spain. Expect a prompt move to this appropriate level as debt holders start panicking what an extra margin demand will mean for them, and in turn try to lock up cash at current repo levels.

As a reminder, from May 5, 2011 Dow Jones:

LONDON (Dow Jones)--Clearing house LCH.Clearnet said Thursday it is raising the extra margin it requires for positions in Irish government bonds cleared through its RepoClear service.


Back in October, the clearing house said it would generally consider a spread of 450 basis points over the 10-year AAA benchmark to be indicative of additional sovereign risk, meaning it may materially increase the margin required for positions in that issuer."

Translation: price, or as the case may be, yield, target.

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kito's picture


Thorlyx's picture

Banks, bitchez........

mayhem_korner's picture

And you run and you run to catch up with the [banks] but their sinking

Racing around, to come up behind you again...

credit: "Time" (Waters/Gilmour)

jkruffin's picture

And the crooks this morning, still trying to ramp the fake ass SPY futures  LOL   This is going to be a bloodbath today after the crappy payroll numbers are released.  No way in hell those are good.

HelluvaEngineer's picture

There are the numbers, and then there are the real numbers.  If QE3 is not ready for launch, they will just make them up.

Vampyroteuthis infernalis's picture

Everyone is waiting for QE3 to be launched at any moment. I am skeptical. Inflationary forces are still lurking with interest rates near all time lows. Wait until the market bloodbath is over and interest rates are double digits, then the printing presses will fire up!

Curtis LeMay's picture

Well said. People tend to forget that long-term unemployed are not counted in the unemployment rate which is cited by Uncle Sam and the MSM.

...And these days we have the highest rate of long-term unemployed since the early 30's.

qussl3's picture

500 pts down on thurs, going into NFP with FOMC next week and a BS conference btw Merkel n Sarkozy?

Smells like a setup to squeeze the shorts.

Im sitting this shit out, short the bounce, too much risk here.

LMAO's picture

Watching Olli Rehns’ address and following questioning raises quite a few eyebrows. In Fact it appears that Olli’s own eyebrows seem permanently attached to his forehead, marking he’s not believing any of the crap he’s spouting himself. 

Thorlyx's picture

That would be a first ! A politician believing what he says...... Come on, where are you coming from ?

Gordon Freeman's picture

No problemo--they will just make margin calls illegal.

"no man--no problem"   --Joseph Stalin

OliverTwist's picture

Could somebody take the time and explain the underlying mechanism a little bit more in detail? Thank you in advance!


disabledvet's picture

I'm no expert but here's how i look at it: normally bond vs equity are two to one in size of respective markets. Right now it's more like ten to one. In other words even a small increase in margin on percent is huge number wise. Since we're all broke there's no cash therefore u must sell either the actual instrument or if youre shorting buy back the collateral. Since almost all liquidity comes in form of shorting treasuries it's a double whammy of outright buying and the mother of all short squeezes. If QE 3 arrives that should pretty much kill pimco and wisdom tree.

Vampyroteuthis infernalis's picture

Oliver, it has to do with bond holders who purchase on margin. When the value of an asset decreases, the clearing house or those who allow investors to buy on margin require higher collateral to borrow. If everyone is buying heavily on margin, when they sell their bonds the clearing house immediately takes cash from the sales of the assets from the seller to meet the new margin requirements. Most likely these same investors are losing money on bonds elsewhere, thus, they have to sell more to make up for the withheld cash and other loses. They are forced to sell to make the new margins. It is a downward spiral. 

OliverTwist's picture

First of all thank you for your help and explanations (both of you). Let see if I've got it right. ... banks in Europe (and not only in europe) are taking loans from eachother and from the central banks and use this money to buy bonds (for example spanish bonds). Then they use these bond as collateral to get more cheap loans and to buy more bonds and other assets. This is one spiral. right? The clearing is made trough clearing houses like this LHC clearing house. Which has the rule to raise margin requirements if a bond passes 450 basis points. So then they need to raise more cash to mantain their positions. In this case if they have not enough cash they have to sell some assets. Right? So they sell for example spanish bonds to meet the margin requirements. But they can also sell stocks, futures or enything else they have as assets. Right? So this could be another spiral downward. This could be also the reason that gold and silver and other not related assets are getting hammered down on these days when the markets are paniking, because big players have liquidity problems and has to sell off everything they have in order to raise cash. Is it right more or less?

Is it also possible to get first the money and then buy bonds and place them as collateral. Is this meant by repo mechanism?




camoes's picture

Margin call bitchez!

Coldfire's picture

Ultimately the system works. Now watch for the markets to be suspended. In the public interest, of course. "Bank holiday". (Bitchez).

Cast Iron Skillet's picture

LHC = Large Hadron Collider?

Thorlyx's picture

I know this girl. Her name was Shirley Moon or something like that. Nice tits by the way.

Dr. Engali's picture

This is both funny to watch and painful at the same time. I love to see the politician bastards squirm but I hate to see the pain the masses are going to feel.

caerus's picture

never fear...germany, france and spain are holding a conference call

Thorlyx's picture

Seems that the menu du jour will be Tapas, Bratwurst and Profiterolles. Why not....

chinawholesaler's picture

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