Dynamic Credit Conditions is a form of credit conditions where we take all of your open contracts and aggregate them into one portfolio to look at the exposure. What this means is that the propensity of being margin called is much smaller in comparison with the standard Classic Conditions, where we look at each contract individually.
In Dynamic Credit Conditions, we understand that you may not at all times use the full line you have with us. Because of this, we have chosen to give a maximum exposure level and the margin call amount based on a percentage of the line you use.
Before digging into the mechanics of Dynamic Conditions and to help understand the credit conditions, we have compiled a list of keywords and their meaning.
Guide to Dynamic Credit Conditions
NOTIONAL
This refers to the maximum amount in currency that you can book with Ebury at the same time.
LINE UTILISATION
The amount in open positions you currently have. For example, if you have one contract open for GBP 1,000,000.00, your current line utilisation would be GBP 1,000,000.00.
INITIAL DEPOSIT (ID)
This is not a cost but an amount to transfer in order to cover any unforeseen credit events during the life of a forward. It is set as a percentage of a contract's notional and is returned either on a pro-rata basis when drawing down or in full when the contract is completed.
VARIATION MARGIN (VM)
Variation Margin is the maximum exposure Ebury can grant before triggering a Margin Call. In Dynamic Conditions, this is set as a percentage (%) and is applied to the Line Utilisation.
MARGIN CALL (MC)
This is an additional deposit that Ebury may request if the exposure of your contracts exceeds the agreed Variation Margin. It is returned in full if the market retraces so that your (Unrealised) P&L is 0, or you don't have any more open contracts. In Dynamic Credit Conditions, the amount payable is set as a percentage (%) and is applied to the Line Utilisation.
LENGTH
It's the maximum length a forward can be booked for and is set as months.
WINDOW LENGTH
The maximum period measured from the end of your Window Forward at which you can do drawdowns.
EXPOSURE
The exposure shows the current market value of your positions taking into account what Initial Deposit and Margin call has been paid.
Mechanics of Dynamic Conditions
The following demonstrates how the Dynamic Credit Conditions work in practice:
Client ABC has the below Dynamic Credit Conditions and open positions:
ID: 0%
VM: 2.5%
MC: 2.5%
POSITION 1
Buy EUR 2,000,000.00
Sell GBP 1,700,000.00 @ 1.1765
POSITION 2
Buy GBP 1,000,000.00
Sell USD 1,300,000.00 @ 1.3000
Since we apply the variation margin and margin call as a percentage of the notional you use, Client ABC's current conditions are as follows:
LINE UTILISATION: GBP 2,700,000.00
VM: GBP 2,700,000.00 x 2.5% = GBP 67,500.00
MC: GBP 2,700,000.00 x 2.5% = GBP 67,500.00
If the market now moves so that GBP appreciates against EUR by 4% and appreciates by 2% against USD, this will affect Client ABC's positions in the following way:
POSITION 1: Negative exposure of GBP 68,000.00
POSITION 2: Positive exposure of GBP 20,000.00
COMBINED: Negative exposure of GBP 48,000.00
Since the combined negative exposure does not exceed the agreed variation margin of GBP 67,500.00, no margin call will be issued. If instead, Client ABC would have had standard Classic Conditions with 2.5% variation margin and 2.5% margin call, a margin call would have been issued for Position 1 for GBP 42,500.00 (2.5% of the notional).
If Client ABC now Draws down GBP 500,000.00 from each positions, the following will happen to their Credit Conditions:
LINE UTILISATION: GBP 1,700,000.00
VM: GBP 1,700,000.00 x 2.5% = GBP 42,500.00
MC: GBP 1,700,000.00 x 2.5% = GBP 42,500.00
Assuming the market also continues to move so that GBP now has appreciated 6% against EUR and 3% against USD, the exposure of the positions will now be:
POSITION 1: Negative exposure of GBP 72,000.00
POSITION 2: Positive exposure of GBP 15,000.00
COMBINED: Negative exposure of GBP 57,000.00
Since the combined negative exposure exceeds the agreed VM of GBP 42,500.00, a margin call would be issued for GBP 42,500.00. If they hadn't made the drawdowns, and the same market moves would have happened, a margin call would have been issued for GBP 67,500.00 instead. The margin call will reduce the exposure to GBP 14,500.00, and if the exposure goes above GBP 42,500.00 again, another margin call will be issued.
If Client ABC would have had Classic Conditions with 2.5% variation margin and margin call, a margin call would have been issued for GBP 60,000.00 (2 x 2.5% of the notional).
