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| {{essay|2002 ISDA|Party A and Party B}} | | {{essay|2002 ISDA|Party A and Party B}} |
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| {{a|isda|}}Unlike many financing documents, the {{isdama}} eschews understandable terms for its participants — ones that help you orient who is who: you know, like “Borrower” and “Lender”; “Bank” and “Client”; or “Buyer” and “Seller” — for the decidedly more gnomic “{{isdaprov|Party A}}” and “{{isdaprov|Party B}}”.
| | ===BINO — bilateral in name only=== |
| | But with the exception of that a class of inter-dealer swap relationships, {{isdama}}s are “bilateral” only really in name: one party — the [[swap dealer]], provides swap products to a client, who consumes them. The client provides the impulse to trade; the client elects when to exercise options and terminate positions. The [[dealer]] hedges calculates values, and is burdened with [[regulatory capital]] charges if it doesn’t get its [[close-out netting]] documentation right. |
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| ===But ''does'' it?===
| | This has led to two kinds of bother: firstly a bit of a squabble as to who gets to be Party A and who Party B; since [[swap dealer|dealers]] set up their templates to assume ''they'' will be Party A and their customers Party B, when immovable object meets irresistible force it can be unseemly. At least one swap dealer solved this problem by electing to be Party B as standard, which only confused its big Asset Management clients who were unused to being Party A. |
| The first thing to notice is that, actually, the {{isdama}} itself does ''not'' use the terms “Party A” and “Party B”. They only arrive in the {{isdaprov|Schedule}}, and then are only of use to distinguishing between the different covenants, details, agents and terms so it is clear which of them applies to one side and which to the other. The ISDA proper, being genuinely bilateral, never has to speak of {{isdaprov|Party A}} or {{isdaprov|Party B}}, because they are arbitrary assignations for clarity. General terms in the {{isdama}} apply equally to both of them.
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| And note: the ''actual'' distinction between the parties; the ''real'' source of their asymmetry, is not whether one is long or short, or buyer or seller: any prudent risk manager will need to do both from time to time — much less whether Party A or B — but whether a given party is using the {{isdama}} to ''change'' its absolute exposure to this risk or that underlier — that person we call a “customer” or “end user” — or to earn a [[commission]] provide someone ''else'' a changed absolute exposure, while at the same time carefully hedging that exposure out so that, but for those fees, the party is market ''flat''. This sort of person we call a swap “dealer” or “broker”. (It is the nature of the beast that a dealer can’t always ''stay'' market flat: it is too dependent upon the creditworthiness of its customers and hedge counterparties for that — but this is not for want of trying. | | Furthermore, when labouring over some neatly [[iatrogenic]] [[co-calculation agent]] fallback dispute mechanism upon which your opponent is hotly insisting — and be assured, you will spend far more time doing this than can ever be justified by your reward, in heaven or on earth, for doing so — it is all to easy to get your “[[Party A]]s” and “[[Party B]]s” back to front, thus burying deep in your fossil record a technical deficiency that no-one will notice until, eighteen years later, when the world once again nearing [[Apocalypse]], the [[Credit officer|chief credit officer]] is running around with her hair on fire, and everyone is glaring at the docs team because the ''key goddamn protection'' has a drafting glitch in it. |
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| | ===The real distinction: dealer and customer=== |
| | And — beyond the small class of interdealer swap contracts that constitute a dealer’s funding programme — there ''is'' a material distinction between the parties. The ''real'' source of asymmetry is not whether one is [[long]] or [[short]], or buyer or seller but whether a given party comes to the relationship as customer or dealer. |
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| | A “customer” or “end user” uses the {{isdama}} to ''change'' its absolute exposure to a given risk or underlier. To take a risk or to lay one off. |
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| | A dealer uses the {{isdama}} to earn a [[commission]]. It does this, yes, by providing someone ''else'' (the customer) a changed absolute exposure, but at the same time carefully hedges that exposure so that, but for those fees, the dealer is market ''flat''. Now, it is the nature of the beast that a dealer can’t always ''stay'' market flat: it is too dependent upon the performance of its customers, counterparties and models for that — but this is not for want of trying. The {{isdama}} is as much a broker/customer document as any other. |
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| In any case almost all {{isdama}}s will be between a ''customer'' and a ''dealer''. A few will be inter-dealer. Almost ''none'' will be inter-customer. | | In any case almost all {{isdama}}s will be between a ''customer'' and a ''dealer''. A few will be inter-dealer. Almost ''none'' will be inter-customer. |
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| ===Etymology===
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| This derives from a working theory that gripped the [[First Men]] as they forged the [[deep magic]] that become the [[First ISDA]]: “a swap contract,” they intoned, “is an equal opportunity sort of an affair; Biblically, righteous in that one is neither a lender nor a borrower under it, but a ''counterparty''”. A counterparty is [[cunisian]]: neither one thing nor the other, but infused with glorious ''possibilities''. Either fellow may owe or be owed; each has, in theory, the same likelihood as the other of being ''[[in-the-money|in]]'' or ''[[out-of-the-money]]''. This is a bilateral relationship.
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| ===BINO===
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| But with the exception of that a class of inter-dealer swap relationships, most {{isdama}}s are “bilateral” only really in name: one party — the [[swap dealer]], provides swap products to a client, who consumes them. The client provides the impulse to trade; the client elects when to exercise options and terminate positions. The [[dealer]] hedges calculates values, and is burdened with [[regulatory capital]] charges if it doesn’t get its [[close-out netting]] documentation right.
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| This has led to two kinds of bother: firstly a bit of a squabble as to who gets to be Party A and who Party B; since dealers set up their templates to assume they are one party and not the other, when immovable object meets irresistible force it can be unseemly. furthermore, when labouring over some neatly iatrogenic [[co-calculation agent]] fallback dispute mechanism upon which your opponent is hotly insisting— you will spend far more time doing this than can ever be justified by the reward in heaven or on earth that you will get for going through the process — it is all to easy to get your “[[Party A]]” and “[[Party B]]” back to front, thus burying deep a technical deficiency that no-one will notice until, eighteen years later, when the world is nearing its next [[Apocalypse|apocalyptic meltdown]], the [[Credit officer|chief credit officer]] is running around with her hair on fire, and everyone is glaring at the docs team because the ''key goddamn protection'' has a drafting glitch in it.
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| {{sa}} | | {{sa}} |
| *{{cotw}} | | *{{cotw}} |
| *[[Close-out]] | | *[[Close-out]] |