Template:M intro isda Party A and Party B: Difference between revisions

Decentralised markets are not a stable equilibrium. <Ref>Sorry, cryptobros.</ref> Whenever one allocates large amounts of risk to a distributed community the opportunity arises for professional introducers to intermediate. To locate buyers and sellers and put them together. Swaps are no different. The swap is by nature a principal-to-principal contract, but the principle is the same: this class of intermediaries sleeve, aggregate and anonymise risk, but they don’t, as far as they can help it, take it. They are there for the ''commission''. Their economic exposure to their customers resembles a lender’s to its borrowers. They are, effectively, ''providing finance''.

Realising this may change how you think about ISDA negotiation. It did for the [[JC]]. So profound did this thought seem that it grew and grew and now there is a [[A swap as a loan|whole new article about it]].

Because, except for a narrow class of [[Inter-dealer|inter-dealer]] swap relationships, {{isdama}}s are dealer-customer [[relationship contracts]] and these are “bilateral” only in ''name'': the [[swap dealer|dealer]] ''provides'' exposures to [[end user|customers]],  who consume them. The customers are, economically, principals: they provide the impulse to trade; they elect when to exercise options, they decide when to terminate positions. The [[dealer]] is — economically, even if not legally — an agent: it hedges, calculates values and is burdened with additional [[regulatory capital]] charges if it doesn’t get its [[close-out netting]] right. But, as long as the customer stays solvent, ''it is not on risk''.