Topic · Portfolio Management & Risk
← All topicsRisk Practice & Regulation
41 articles · 7 checkpoints · 28 deeper reads · 6 reference notes
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Initial margin is the deposit that covers what could go wrong tomorrow; variation margin is the cash that settles what already went wrong today. Confusing the two is one of the most common mistakes newcomers make about how leveraged trading actually works.
When you trade a derivative instead of a listed instrument, your gain depends on the other side actually paying it. Counterparty credit risk is the chance they can't, and it gets much worse when their ability to pay is correlated with the very event that made you money.
Market liquidity risk is about not being able to sell an asset without moving its price; funding liquidity risk is about not being able to raise cash at all, even against assets you could sell, and the two feed each other in a crisis.
When a leveraged account's equity falls below what a broker requires, the broker demands more cash, and if it doesn't arrive in time, the broker closes the position itself, often at the worst possible moment.
A limit framework is the set of hard boundaries, on position size, VaR, leverage, concentration, that a firm sets before a trade ever happens, so that no single desk can blow up the whole book by the time anyone notices.
The Basel Accords are the international rulebook that decides how much loss-absorbing capital a bank must hold against its risks. Each version, I, II, III, was written in direct response to the last crisis it failed to prevent.
FRTB is the post-2008 rewrite of how banks must calculate capital against trading-book risk, replacing VaR with expected shortfall, drawing a sharper line between trading and banking books, and making it much harder for a desk to game its way into a lower capital charge.
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