Template:M gen Equity Derivatives 6.3: Difference between revisions

From The Jolly Contrarian
Jump to navigation Jump to search
Created page with "{{eqderivprov|Market Disruption Event}}s is part of Section {{eqderivprov|6}} ({{eqderivprov|Valuation}}) in the {{eqdefs}}, so this isn’t really about catastrophic, end-of-..."
 
No edit summary
 
Line 1: Line 1:
{{eqderivprov|Market Disruption Event}}s is part of Section {{eqderivprov|6}} ({{eqderivprov|Valuation}}) in the {{eqdefs}}, so this isn’t really about catastrophic, end-of-days events that might bring your {{eqderivprov|Transaction}} to an unexpected, premature end. For that you should look to Section {{eqderivprov|12}}, and especially {{eqderivprov|12.8}} and {{eqderivprov|12.9}}.
{{mdes vs ades}}
{{mdes vs ades}}
===[[Synthetic prime brokerage]]===
The {{eqderivprov|Valuation Date}} comes in handy if you are restriking your {{isdaprov|Transaction}}s periodically, as you are likely to be doing if you are providing [[synthetic prime brokerage]] — being as it is, an undated [[delta-one]] exposure to equities delivered through an equity derivative.
Your [[prime broker]] will not want to run indeterminate exposures to shares, even if it is collateralised daily, so restriking the transactions periodically can zero out whatever the [[LRD|residual risk]] is in the paranoid eyes of your financial controllers.
Now interim {{eqderivprov|Valuation Date}}s — which are glorified estimates of the present value of an ongoing position — and the final {{eqderivprov|Valuation Date}} — which is the price at which you definitively close out your position and go “off risk” — have rather different consequences. [[Tax attorney|US Tax attorney]]s, as obsessed as they are with avoiding the suggestion that a swap counterparty is controlling its [[broker]]’s hedge, will seek to avoid any suggestion that the ''final'', scheduled valuation arises from anything quite so mucky as the price at which the broker closes out its hedge. So, there, expect references to [[VWAP]].
The same [[tax attorney]] will not be so bothered how you come up with your prices on other {{eqderivprov|Valuation Date}}s, seeing as on that theory of the game, the counterparty is not going on or off risk.
In the [[synthetic prime brokerage]] world, where {{isdaprov|Transaction}}s are callable at will, that ''scheduled'' {{eqderivprov|Termination Date}} is a fairly arbitrary figure plucked out of the air at some point in the distant future, as much as anything else because “{{eqderivprov|Termination Date}}” is a mandatory field in your PB’s booking system. Also, to quiet the black horses of despair playing through the wild paddocks of your financial controller’s tortured psychology. It won’t, of course, but you can always try.
Curiously, [[tax attorney]]s are less exercised about the method by which a [[Broker]] values the transaction for an ''optional'' early termination, even though that is the usual method by which a client terminates a synthetic equity swap, which is broadly an undated transaction terminable at the client’s whim.

Latest revision as of 13:37, 11 May 2022

Market Disruption Events vs Additional Disruption Events showdown

In a Nutshell:

So the two are independent: one is where you want to carry on; one where you don’t. So you don't have to wait for a period of Exchange Disruption before invoking a Hedging Disruption, and conversely you could — in theory at any rate — designate an Exchange Disruption even if there were no Hedging Disruption in existence.

Now in point of fact, an Exchange Disruption — especially a long one — usually will count as a Hedging Disruption which might be why the Consequences of Disrupted Days wording in Section 6.6 seems to run out of enthusiasm for its own existence, as if ISDA’s crack drafting squad™ suddenly realised the whole world is futile and threw in the towel. After all, if there have been eight straight Disrupted Days, the likelihood that one or other party hasn’t canned the Transaction on the grounds of Hedging Disruption must be pretty low.

Synthetic prime brokerage

The Valuation Date comes in handy if you are restriking your Transactions periodically, as you are likely to be doing if you are providing synthetic prime brokerage — being as it is, an undated delta-one exposure to equities delivered through an equity derivative.

Your prime broker will not want to run indeterminate exposures to shares, even if it is collateralised daily, so restriking the transactions periodically can zero out whatever the residual risk is in the paranoid eyes of your financial controllers.

Now interim Valuation Dates — which are glorified estimates of the present value of an ongoing position — and the final Valuation Date — which is the price at which you definitively close out your position and go “off risk” — have rather different consequences. US Tax attorneys, as obsessed as they are with avoiding the suggestion that a swap counterparty is controlling its broker’s hedge, will seek to avoid any suggestion that the final, scheduled valuation arises from anything quite so mucky as the price at which the broker closes out its hedge. So, there, expect references to VWAP.

The same tax attorney will not be so bothered how you come up with your prices on other Valuation Dates, seeing as on that theory of the game, the counterparty is not going on or off risk.

In the synthetic prime brokerage world, where Transactions are callable at will, that scheduled Termination Date is a fairly arbitrary figure plucked out of the air at some point in the distant future, as much as anything else because “Termination Date” is a mandatory field in your PB’s booking system. Also, to quiet the black horses of despair playing through the wild paddocks of your financial controller’s tortured psychology. It won’t, of course, but you can always try.

Curiously, tax attorneys are less exercised about the method by which a Broker values the transaction for an optional early termination, even though that is the usual method by which a client terminates a synthetic equity swap, which is broadly an undated transaction terminable at the client’s whim.