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Equity derivatives dispute rights: Difference between revisions
Equity derivatives dispute rights (view source)
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{{a| | {{a|spb|}}You will, frequently encounter [[buyside counsel]] who are fixated on calculation agent dispute rights. Equity derivatives are no exception. It makes no more sense here than anywhere else. | ||
Valuation signals for [[equity derivatives]] — traded prices on [[Venue|execution venues]] — are generally [[liquid]], independent, and observable. [[Equity derivatives]] are an access product: the [[dealer]] provides its clients with [[exposure]], and hedges it delta-one: the dealer does not take a naked proprietary position one way or another (thanks to Volcker and equivalent rules, it is not allowed to). | Valuation signals for [[equity derivatives]] — traded prices on [[Venue|execution venues]] — are generally [[liquid]], independent, and observable. [[Equity derivatives]] are an access product: the [[dealer]] provides its clients with [[exposure]], and hedges it delta-one: the dealer does not take a naked proprietary position one way or another (thanks to Volcker and equivalent rules, it is not allowed to). | ||
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===Distressed markets=== | ===Distressed markets=== | ||
Now in distressed markets — where [[market disruption event]]s prevent a [[dealer]] effectively hedging so the dealer wants to forcibly exit the position — it is true the market isn’t liquid and there might not be observable prices — or ''any'' prices. But, again, that is the client’s risk, not the [[dealer]]’s: dealers don’t provide [[warranties]] of market liquidity, much less as to (lack of) volatility or market price. That’s not the deal: that is the ''exact'' risk that client is taking by investing in equities. | Now in distressed markets — where [[market disruption event]]s prevent a [[dealer]] effectively hedging so the dealer wants to forcibly exit the position — it is true the market isn’t liquid and there might not be observable prices — or ''any'' prices. But, again, that is the client’s risk, not the [[dealer]]’s: dealers don’t provide [[warranties]] of market liquidity, much less as to (lack of) volatility or market price. That’s not the deal: that is the ''exact'' risk that client is taking by investing in equities. | ||
The dealer, like the client, wants to get the best price it can, to keep the client happy. But market disruption bad enough to to force dealers out of positions is not common. Hedging disruption is unusual. It is also where the dealer earns its keep, by managing its client relationship. It will get on the phone. It will seek to build consensus on what to do in the circumstances, which seem plain in hindsight, but were impossible to predict in advance. | The dealer, like the client, wants to get the best price it can, to keep the client happy. But market disruption bad enough to to force dealers out of positions is not common. Hedging disruption is unusual. It is also where the dealer earns its keep, by managing its client relationship. It will get on the phone. It will seek to build consensus on what to do in the circumstances, which seem plain in hindsight, but were impossible to predict in advance. | ||
If the client has a source of liquidity the dealer will be all ears — but considering that the reason they formed their relationship was on account of the dealer’s superior market connectivity and access to liquidity, how likely is it that suddenly the client has all the best market intel? In any case, what the dealer and its client do not want to do in a time of stress — and more to the point, will not do — is start poring over their docs to investigate their precise legal obligations. A market | If the client has a source of liquidity the dealer will be all ears — but considering that the reason they formed their relationship was on account of the dealer’s superior market connectivity and access to liquidity, how likely is it that suddenly the client has all the best market intel? In any case, what the dealer and its client do not want to do in a time of stress — and more to the point, will not do — is start poring over their docs to investigate their precise legal obligations. A market disruption is nobody’s fault. They are smart people — [[subject matter expert]]s, indeed — in possession of all available information relevant to the situation to figure out the best way through it, in a way that ISDA negotiating [[legal eagles]], lobbing hypotheticals at each other years before aqny of these events happen, simply are not. | ||
The parties will figure it out. | |||
Do not, therefore, piss around with {{eqderivprov|Determining Party}} dispute right fallbacks. | Do not, therefore, piss around with {{eqderivprov|Determining Party}} dispute right fallbacks. | ||