There are formulaic requirements based on volatility and risk, but those aren't specific to one stock. The clearing exchange exercised discretion in applying a new collateral requirement, and in doing so put its thumb on the scale.
Especially when one of the main reasons for needing to post more collateral isn't necessarily that your position is underwater but rather volatility has picked up and risk needs to be brought down. This happens because futures especially trade with very high leverage.
Also generally the amount of collateral that needs to be posted is in the millions of USD so people tend to understand that isn't instant, especially if those funds are currently in money market funds or bonds held elsewhere.
Is there any evidence that RH's collateral requirements specifically are increasing?
The DTCC typically has a restricted list of specific securities with higher than usual collateral requirements, usually because of volatility - it seems that in RH's case, their use base mostly wants to trade stocks on this restricted list, causing severe issues for RH.
One thing I haven't seen answered but which I think would be enlightening is, how often do DTCC collateral requirements change such that trading in the stock is restricted? Although the answer may throw more fuel on the fire if it's a rare event.
The issue is that the volatility had been unprecedentedly high for a week, but they jumped up the collateral requirements overnight. It would be one thing if they'd stepped it up in time with volatility, but by the timing, it looks less like a protective and more like a punitive step.
A lot of financial transactions and central clearinghouses require participants to post collateral. For example if an insurance company enters into an interest rate swap with a bank, both sides will have to post some percent of the contract's notional value in escrow. This protects both sides from counterparty risk (i.e. what if the insurance company goes out of business and can't pay its side of the swap).
The collateral needs to take the form of low-risk, liquid securities. Usually government bonds. Bringing a big bag full of cash to a derivatives exchange is not accepted. If you're a big financial institution, you have no choice but to buy government bonds. Even if they're negative yielding.
Since 2008, there's been a massive increase in financial regulations. Policy-makers have desperately pushed to make banks and other financial institutions less risky. That mostly means much higher capital requirements and more central clearing. In turn that means the demand for holding high-quality government has exploded.
This is misinformation. The DTCC used their discretionary powers to jack up the collateral requirements on certain specific stocks to 100%, well above what was required by the VaR formula.
Well then what is the reason? I've not seen anything else. The CEO was cagey when asked about liquidity, but every official release has suggested that the collateral requirements were the problem.
These are all over-collaterized, so you're usually borrowing up to 30% of your collaterals value, it's nowhere near the 2-20x leverage that you might get in traditional markets or leverage based exchanges.
I think it makes a lot of sense in the current bull market, it probably makes less sense in a bear market unless you're borrowing only up to like 5-10% of your collateral to actually spend on something you need.
There's also risk involved in taking possession of collateral. If you've written a loan such that collateral is 2x the loan amount, but then all potential buyers of the collateral fall on similar hard times such that you have to sell it at 10 cents on the dollar, then you've still lost 80% of your loan value. Prices aren't static, and they reflect what's going on in the market at any given moment. If the market basically evaporates right as your loan comes due, then the value of your collateral isn't what it was when the loan was written, it was what it is when the loan defaults.
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