Laurent Paulhac Discusses Portfolio Margining

Laurent Paulhac

 

In the new world of cleared over-the-counter trades brought on by financial regulation in around the globe, margin requirements have emerged as one of the primary concerns of OTC participants. One solution to avoiding excessive capital requirements is portfolio margining. MarketsReformWiki this week interviewed Laurent Paulhac, CME Group’s senior managing director of OTC products and services, about what exactly portfolio margining is, and how it can be applied in the new environment. Paulhac told MarketsReformWiki:

 

Portfolio margining is the ability to take a diverse portfolio of instruments that are highly correlated, and look at the overall risk on a combined basis, and margin the portfolio as a group. For example, suppose you have a long Eurodollar position that would normally carry a $5 million margin, and an equivalent short interest rate swap position that would be assessed a $12 million margin. Portfolio margining takes into consideration that the overall risk of the position is not the sum of the two, so you would not be assessed the full $17 million. Neither would it be a fully offset $7 million; depending on certain factors, the actual margin would be somewhere between $7 and $12 million.

Paulhac also explained how margining between futures and OTC contracts is a new concept that adapts to new regulation:

This is not a new thing. We have done this for years in the world of futures. What is relatively new, though, is the ability to offer portfolio margining between futures contracts and OTC cleared swaps. A swap dealer, which is essentially a liquidity provider for swaps, will, as soon as it makes a trade with a client, be looking to offset the risk of the position in the inter-dealer market, either with another dealer or, as is often the case, by using Eurodollar futures. For that particular firm, portfolio margining is very attractive, as it substantially reduces overall margin cost.

Read the full interview at MarketsReformWiki.

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