Template:Calculation agent versus determination agent: Difference between revisions

From The Jolly Contrarian
Jump to navigation Jump to search
No edit summary
No edit summary
 
(5 intermediate revisions by the same user not shown)
Line 1: Line 1:
The {{eqderivprov|Determining Party}} only ever has to determine a {{eqderivprov|Cancellation Amount}}, {{eqderivprov|Cancellation and Payment}} or {{eqderivprov|Partial Cancellation and Payment}} under {{eqderivprov|12.8}}, and that will only happen in only when a {{eqderivprov|Transaction}} terminates following an {{eqderivprov|Extraordinary Event}} or an {{eqderivprov|Additional Disruption Event}}.
==={{eqderivprov|Calculation Agent}} vs. {{eqderivprov|Determining Party}}===
==={{eqderivprov|Calculation Agent}} vs. {{eqderivprov|Determining Party}}===
'''Why''': The {{eqderiv}} recognise that while most calculations could be performed by whoever is appointed {{eqderivprov|Calculation Agent}}, determination of a {{eqderivprov|Cancellation Amount}} is inextricably related to the [[hedge]] and — especially where there is a [[Market Disruption Event - Equity Derivatives Provision|disrupted market]] – this is best to be calculated by the one whose problem it is to unwind that hedge: namely, the {{eqderivprov|Hedging Party}}.  
'''Why''': The {{eqderiv}} recognise that while most calculations could be performed by whoever is appointed {{eqderivprov|Calculation Agent}}, determination of a {{eqderivprov|Cancellation Amount}} is inextricably related to the [[hedge]] and — especially where there is a [[Market Disruption Event - Equity Derivatives Provision|disrupted market]] – this is best to be calculated by the one whose problem it is to unwind that hedge: namely, the {{eqderivprov|Hedging Party}}.  
Line 8: Line 10:
Lastly, note that if your investment bank is as left-handedly configured as some the [[JC]] has come across,<ref>AND WHO SHALL REMAIN NAMELESS.</ref> the group entity writing the equity swaps might not be the same as the one doing the physical hedging of those swap obligations (with a back-to-back trade between them, for example), so the Hedging Party/Determining Party might not be either party to the actual {{isdama}} at all.
Lastly, note that if your investment bank is as left-handedly configured as some the [[JC]] has come across,<ref>AND WHO SHALL REMAIN NAMELESS.</ref> the group entity writing the equity swaps might not be the same as the one doing the physical hedging of those swap obligations (with a back-to-back trade between them, for example), so the Hedging Party/Determining Party might not be either party to the actual {{isdama}} at all.


''So'' confusing.
===The User’s Guide===
We have noted [[12.7(c) - Equity Derivatives Provision|elsewhere]] that the User’s Guide is less forthcoming than one might like it to be on what the Determining Party is for, and when (or why) there might ever be ''two''. But it does say this:
 
{{quote|“{{cancellation amount UG}}”}}


'''When''': The {{eqderivprov|Determining Party}} only ever has to determine a {{eqderivprov|Cancellation Amount}}, {{eqderivprov|Cancellation and Payment}} or {{eqderivprov|Partial Cancellation and Payment}} under {{eqderivprov|12.8}}, and that will only happen in only when a Transaction terminates following an {{eqderivprov|Extraordinary Event}} or an {{eqderivprov|Additional Disruption Event}}.
If this is meant to help, it singularly fails to, except to recognise that the {{eqderivprov|Determining Party}} is acting ''in its capacity as a {{eqderivprov|Hedging Party}}'', and not in its gnomic, wise, dispassionate role as impartial determiner of abstract values. This explains, maybe, why {{icds}} thought it worthwhile to have distinct roles of {{eqderivprov|Calculation Agent}} and {{eqderivprov|Determining Party}} — it is not saying (as far as we can tell) that the party who is {{eqderivprov|Calculation Agent}} cannot ''be'' {{eqderivprov|Determining Party}} at all, but only that when it ''is'' being a {{eqderivprov|Determining Party}} it  is ''not'' being {{eqderivprov|Calculation Agent}}: the two roles wear different trousers, so to speak.  


'''Enter the lawyers''': Nevertheless, this is all the opportunity my brethren in the [[Mediocre lawyer|legal profession]] need  to confect, and spray-hose all over your confirmation, language like ''“determination or calculation, [[as the case may be]], made (respectively) by the  {{eqderivprov|Calculation Agent}} or  {{eqderivprov|Determining Party}}, [[as the case may be]]”''.
But what it ''does'' confirm is that the {{eqderivprov|Determining Party}} is meant to refer to the person who is actually hedging the trade, and that what they will be doing is liquidating hedges to get prices.

Latest revision as of 19:42, 11 January 2022

The Determining Party only ever has to determine a Cancellation Amount, Cancellation and Payment or Partial Cancellation and Payment under 12.8, and that will only happen in only when a Transaction terminates following an Extraordinary Event or an Additional Disruption Event.

Calculation Agent vs. Determining Party

Why: The Equity Derivatives recognise that while most calculations could be performed by whoever is appointed Calculation Agent, determination of a Cancellation Amount is inextricably related to the hedge and — especially where there is a disrupted market – this is best to be calculated by the one whose problem it is to unwind that hedge: namely, the Hedging Party.

In theory (though almost never in practice)[1] the Hedging Party might not be the Calculation Agent.

In theory, too, the Hedging Party might not be named the Determining Party. Which is kind of awkward, since the Cancellation Amount is couched in terms of the cost to the determining Party of unwinding, liquidating or re-establishing its hedge — which it would only do if it was, like, hedging.

Lastly, note that if your investment bank is as left-handedly configured as some the JC has come across,[2] the group entity writing the equity swaps might not be the same as the one doing the physical hedging of those swap obligations (with a back-to-back trade between them, for example), so the Hedging Party/Determining Party might not be either party to the actual ISDA Master Agreement at all.

The User’s Guide

We have noted elsewhere that the User’s Guide is less forthcoming than one might like it to be on what the Determining Party is for, and when (or why) there might ever be two. But it does say this:

“In calculating a Cancellation Amount, a Determining Party is required to act in good faith and to use commercially reasonable procedures. It should be noted that quotations are not necessarily required, as depending on the Transaction in question, the cost of liquidating hedges may be a more appropriate basis for determining a Cancellation Amount than soliciting quotations.[3]

Parties should note that the Determining Party is the party that will be calculating its own cost of replacing or providing the economic equivalent of a terminated Transaction. The Calculation Agent may be a party to the Transaction, but when performing its duties as Calculation Agent it is acting as a neutral party. The Calculation Agent as such will not have a replacement cost or economic equivalent and therefore should not be designated as the Determining Party.[4]

If this is meant to help, it singularly fails to, except to recognise that the Determining Party is acting in its capacity as a Hedging Party, and not in its gnomic, wise, dispassionate role as impartial determiner of abstract values. This explains, maybe, why ISDA’s crack drafting squad™ thought it worthwhile to have distinct roles of Calculation Agent and Determining Party — it is not saying (as far as we can tell) that the party who is Calculation Agent cannot be Determining Party at all, but only that when it is being a Determining Party it is not being Calculation Agent: the two roles wear different trousers, so to speak.

But what it does confirm is that the Determining Party is meant to refer to the person who is actually hedging the trade, and that what they will be doing is liquidating hedges to get prices.

  1. If Calculation Agent == Dealer, and Dealer == Hedging Party, and Hedging Party == Determining Party, then Calculation Agent == Determining Party.
  2. AND WHO SHALL REMAIN NAMELESS.
  3. May be”. You think?
  4. Emphasis added.