Template:Hypothetical broker-dealer capsule: Difference between revisions

===But ''do'' synthetic equity swaps resemble disguised custody arrangements?===

:(i) a [[synthetic prime broker]] will hedge [[delta-one]] across its whole client portfolio — some of which will be [[short]], and some [[long]] — so there is no one-to-one relationship between each client’s long position and the [[prime broker]]’s net [[physical hedge]] in the first place — that is to say, there is no assurance that the prime broker is holding ''anything'' in custody at any time; and

:(ii) even if there were, the [[prime broker]] will almost certainly finance the [[net]] [[long]] portion of its [[delta]] anyway, to reduce its [[funding cost]]s, by lending it out, [[title transfer]], for [[cash]], so even if the [[prime broker]] has a corresponding exposure, it won’t be hedging it with holding a physical [[hedge]] ''at all'', let alone one it is covertly holding on custody for its clients.  

But US [[tax attorney]]s wilfully ignore all this dispiriting logical talk and insist the only thing that can save you are some [[magic words]] about you [[hedge]] costs being incurred by a [[hypothetical broker dealer]] exactly ''like'' you, but who ''isn’t'' you.