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.

Posted at 12:02 pm IST on Sun, 14 Sep 2008         permanent link

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