Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Visible benefits of margining FIIs

Foreign Institutional Investors (FIIs) resisted being margined in
the Indian stock market, but the benefits of margining are now quite
visible. Today, the Wall Street Journal reports that
“Lehman has hired law firm Weil, Gotshal & Manges LLP to
prepare a potential bankruptcy filing, according to a person familiar
with the situation. The New York-based Weil has a leading bankruptcy
practice and advised Drexel Burnham Lambert on its 1990 bankruptcy
filing.” Lehman may yet be rescued, but the report serves to
remind all of us that a bankruptcy of a US firm leaves non US
creditors totally in the lurch as explained
by the London Banker in the Finance and Markets Monitor at RGE
Monitor.

The basic premise is that each jurisdiction buries its own dead and
keeps whatever treasure or garbage it finds with the corpse. Local
creditors get to recover their claims out of the locally available
assets. …

The key to having a happy insolvency, if such a thing exists, lies
in ensuring that when a globalised bank goes bust, all the best assets
are inside your borders and subject to seizure by your liquidators on
behalf of your creditors. Everyone else outside your borders is on
their own.

The margining system ensures that there are enough assets within
Indian borders to satisfy the needs of Indian counterparties. In this
context, the unmargined OTC inter bank market leaves Indian
counterparties at risk when foreign entities go bankrupt. That is an
additional reason why the RBI should abandon its bias in favour of OTC
markets and move more and more markets to an exchange traded and
novated platform.

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