Margin Requirements for Credit Default Swaps
Chapters in this video
- 0:00 What a CDS is and who trades it
- 1:26 Why CDS are derivatives, not insurance
- 2:35 Cleared versus uncleared: the core distinction
- 3:24 Exam trap: no extra FINRA layer on cleared CDS
- 4:01 Uncleared CDS: initial margin for future exposure
- 4:46 Uncleared CDS: variation margin for daily mark-to-market
- 5:30 How CDS margin rules differ from Reg T equity margin
- 6:01 Rapid-fire exam recap
What this video covers
- The basic CDS structure: protection buyer, protection seller, premium payments, and the reference entity default trigger
- Why a CDS buyer does not need an insurable interest in the reference entity, and how this distinguishes CDS from insurance regulation
- Why CDS fall under SEC, Commodity Futures Trading Commission (CFTC), and FINRA oversight rather than state insurance boards
- The cleared versus uncleared distinction: when the clearing agency sets margin and when FINRA's own method applies
- Why a cleared CDS uses only the clearinghouse margin amount, with no separate FINRA layer stacked on top
- How uncleared CDS margin works: initial margin for potential future exposure and variation margin for current mark-to-market
- Why a firm doing both equities and swaps must comply with two completely separate margin frameworks simultaneously
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