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What does it mean for an instrument to be "balance sheet intensive"?

I found people mean it different things. People say bonds and repos are balance sheet intensive. Some say swaps are balance sheet intensive and some say not...

My understanding is that "an instrument is balance sheet intensive" means that the initial capital you have to put in is big. In this sense, swaps are not balance sheet intensive, are they? As they are a derivative.

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    $\begingroup$ Agree with you that it's a vague concept. I suppose it also depends on the regulatory treatment of the instrument, and whether you can assign it as part of a hedge etc. Furthermore, although a swap may initially not be balance sheet intensive, it could become so depending on the amount of collateral you have to put against it, i.e. depends on its MtM. $\endgroup$ – Frido Rolloos Nov 2 '20 at 16:06
  • $\begingroup$ Whether or not the instrument is centrally cleared will have an effect in addition to whether or not its funded (e.g. bond) or unfunded (e.g. swap). $\endgroup$ – user42108 Nov 2 '20 at 16:20
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    $\begingroup$ This is indeed a vague concept, and it does not help the 2008-2009 crisis changed things. On the one hand, a trade can require little capital because it is a financing trade: for example a total return swap is not balance sheet intensive because it gives you exposure to asset returns without having to outright purchase the asset. On the other hand, since the crisis there are more trades that are balance sheet intensive because of regulatory capital to be held against them: for example securitized products, at the heart of the financial meltdown, are now heavily penalized. $\endgroup$ – Daneel Olivaw Nov 2 '20 at 16:47
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Balance sheet intensive depends upon many factors. As examples;

From experience, bank market making desks were expected to minimise their 'balance sheet' which, in this case, meant the sum of the absolute value of positions (short and long), into an accounting period. This would limit the number of outstanding repos which were required for funding over the accounting window and therefore reduce exposures which could impact the regulatory leverage ratio.

On the other hand, cleared (and therefore collateralised) swaps offer little impact to the capital ratio or the leverage ratio, but an uncollateralised 40Y swap with a counterparty who is a debt counterpart would have a large exposure at default calculation and therefore represent a sizeable "risk weighted asset" which might heavily impact the capital ratio.

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