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'''''Note''': equity give-ups are the standard way of executing [[delta-one]] [[equity swap|equity swaps]] in the European market, a common method in APAC, but unheard of in the U.S. This is mainly due to their varying attitudes towards tax.'' | |||
Under a cash [[equity give-up]], the [[hedge fund]] seeks a ''firm price'' indication for a [[cash equity]] from an {{tag|executing broker}}, but ''does not act on it'': rather, the [[hedge fund]] says, “all right, sir: hold that thought”, and runs off to its favourite [[prime broker]], whom it instructs to enter into a {{tag|swap}} at the exact price quoted by the {{tag|executing broker}}, directing the [[PB]]’s attention to the winsome [[executing broker]] who is sitting by the phone, dutifully holding its thought, all dressed up and with nowhere yet to go. | Under a cash [[equity give-up]], the [[hedge fund]] seeks a ''firm price'' indication for a [[cash equity]] from an {{tag|executing broker}}, but ''does not act on it'': rather, the [[hedge fund]] says, “all right, sir: hold that thought”, and runs off to its favourite [[prime broker]], whom it instructs to enter into a {{tag|swap}} at the exact price quoted by the {{tag|executing broker}}, directing the [[PB]]’s attention to the winsome [[executing broker]] who is sitting by the phone, dutifully holding its thought, all dressed up and with nowhere yet to go. | ||
In practice, the [[executing broker]] is not quite that demure. It will pre-emptively “allege” the cash trade to the [[hedge fund]]’s [[prime broker]]<ref>Whose identity the [[hedge fund]] may have “inadvertently” let on during the post-coital conversation. WAIT: THERE WAS NO COITUS, REMEMBER?</ref> | In practice, the [[executing broker]] is not quite that demure. It will pre-emptively “allege” the cash trade to the [[hedge fund]]’s [[prime broker]],<ref>Whose identity the [[hedge fund]] may have “inadvertently” let on during the post-coital conversation. WAIT: THERE WAS NO COITUS, REMEMBER?</ref> which is rather like buzzing in on University Challenge before Bamber Gascoigne has finished asking the question: “a little birdie tells me you are going to instruct me to trade on an equity to [[hedge]] an [[equity swap]] you’re about to put on with your client hedge fund X. Well — here it is!” | ||
Once the [[PB]] has accepted the [[EB]] | Once the [[PB]] has accepted the [[EB]]’s “[[allegation]]”, the [[PB]] “prints” the trade with the [[hedge fund]], usually in the form of a [[synthetic equity swap]]<ref>A.k.a a “[[contract for differences]]” or “[[CFD]]”.</ref> transacted under an {{isdama}}. | ||
Calling this a “give-up” is a misnomer, since'' nothing is actually “given up”''. In theory — even if not awfully often<ref>That is to say, ''ever''.</ref> in practice — the [[prime broker]] can feign ignorance and refuse to transact with the [[executing broker]], thereby hanging the [[executing broker]] out to dry with any recourse against ''anyone'' for the equity trade it has executed. | Calling this a “give-up” is a misnomer, since'' nothing is actually “given up”''. In theory — even if not awfully often<ref>That is to say, ''ever''.</ref> in practice — the [[prime broker]] can feign ignorance and refuse to transact with the [[executing broker]], thereby hanging the [[executing broker]] out to dry with any recourse against ''anyone'' for the equity trade it has executed. | ||
The executing broker may have stern words to the [[hedge fund]] about this, but not ones that would sound in damages: the entire theory of | The [[executing broker]] may have stern words to the [[hedge fund]] about this, but not ones that would sound in actual damages (but — you know — good luck with your ongoing relationship with that [[broker]], right?): the entire theory of their arrangement is that the [[hedge fund]] never committed to any trade with the [[executing broker]]. All care, no responsibility. | ||
Why all this delicate tiptoeing around the subject? [[Tax]], in a word. There are no<ref>Okay — ''mostly'' no stamp duties. In the US, [[Section 871(m)]] has gone some way to equalising the tax payable under synthetic and cash transactions, which means the resting state of squeaky-bummitude of your [[US tax attorney]]s is now some way more comfortably positioned than it was in the old days.</ref> stamp duties payable on [[equity derivatives]]. There are all kinds payable on cash equity transactions.<ref>[[SDRT]] in the UK, [[FTT]] in various European jurisdictions, and in the US a typically baroque arrangement covered in Section [[871(m) ]] of the [[Internal Revenue Code]].</ref> So the name of the game is that the fund is arranging a transaction between two brokers, not executing one. | |||
Regulated [[broker-dealer]]s may have intermediary exemptions from these; clients like [[hedge fund]]s generally will not. So if the taxman decides that the fund has bought the security from the [[executing broker]] and then sold it to its [[prime broker]], then the hedge fund gets hit for [[stamp duty]] ''twice''. If the {{tag|broker}} buys directly from another [[broker]], there will be at the most one dutiable transaction (and, if intermediary relief applies, there may be none). | |||