Time trial: the big risks that lurk in OTC margin gaps
Banks take aim at margin and trade-flow lag that can cause 95% of counterparty risk
In the summer of 1998 a young trader at a US bank was called into the office on a weekend to draft a letter explaining to a big client – the hedge fund, Long-Term Capital Management (LTCM) – how the bank valued cross-currency swaps. The fund was disputing its margin calls and had stopped paying in the meantime.
“I considered it odd that I, with only a few years of experience at the time, had to explain to all these high-powered individuals some basic foreign exchange parity relationships,” he
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