Banks turn to synthetic derivatives to cut initial margin

Options-based instruments can halve initial margin for some non-cleared products, say dealers

lower costs
Banks say big reductions in IM can be achieved by using synthetic swaps

At least two dealers have turned to so-called synthetic derivatives to reduce the initial margin (IM) required for their interest rate and foreign exchange portfolios, with estimated margin savings of up to 50% on some positions.

New margin rules require large dealers to post initial margin against new non-cleared derivatives positions. This has created a problem for the trading of instruments such as swaptions, which are non-cleared but hedged with cleared swaps.

Under the industry’s agreed s