Structured finance professionals aren’t losing much sleep over a new regulation barring federally-insured banks from engaging in certain kinds of swaps with vehicles that issue asset-backed securities. But there’s plenty of anxiety about a separate proposal that would require ABS vehicles to post variation margin — basically additional cash — everyday on the swaps they tend to engage in.
Swaps are agreements to exchange one set of cash flows for another. They are commonly used to protect against interest rate mismatch in a deal that pays a fixed rate of interest but is backed by floating-rate loans, for instance. This can raise the credit quality of a deal to a point where it is palatable to target investors. The same goes for a security denominated in a different currency than the underlying collateral.