Hedging Disruption - Equity Derivatives Provision: Difference between revisions
Jump to navigation
Jump to search
Amwelladmin (talk | contribs) No edit summary |
Amwelladmin (talk | contribs) No edit summary |
||
Line 1: | Line 1: | ||
{{fullanat2|eqderiv|12.9(a)(v)||12.9(b)(iii)|}} | {{fullanat2|eqderiv|12.9(a)(v)||12.9(b)(iii)|}} | ||
{{Nuts|Equity Derivatives|Hedging Disruption}} | {{box| | ||
{{Nuts|Equity Derivatives|Hedging Disruption}}}} | |||
===Why the | ===Why the “why should I pay your hedging costs? I have no control over them” argument is bogus=== | ||
Because synthetic PB is just cash brokerage done with derivatives and you would | Because [[synthetic PB]] is just cash brokerage done with derivatives and you would wear them in a cash trade, is why. | ||
*The [[broker]] owes | *The [[broker]] owes [[best execution]]. That means it has to interrogate all venues and get the best possible price. | ||
*Under [[best execution]] rules the client | *Under [[best execution]] rules the client may instruct the broker to exclude certain venues and brokers. | ||
* | *To comply with best execution, the broker must configure its [[order router]] to accommodate the client’s preferences. | ||
*But excluding a venue impacts the quality of the available execution (whenever | *But excluding a venue impacts the quality of the available execution (whenever the excluded venue had the best price, you’d miss it). | ||
*By not excluding the venue, therefore, you ''benefit'' from the venue being present (as long as it doesn’t fail) every order you place. | *By not excluding the venue, therefore, you ''benefit'' from the venue being present (as long as it doesn’t fail) every order you place. | ||
*Trades settle [[DVP]] so | *Trades settle [[DVP]] so there is [[market risk]] in replacing the trade, not [[credit risk]]. | ||
* | *The market risk could be significant: failure of a venue will heavily impact [[liquidity]] and market [[volatility]] for a period. | ||
*Asking the broker to underwrite | *Asking the broker to underwrite a market loss when a venue or [[intermediate broker]] fails while getting the benefit its best pricing as long as it does not is asking for a free option on your own execution risk. | ||
===Pernickety amendments=== | ===Pernickety amendments=== | ||
Expect to see some amendments to this clause, chiefly to appease [[Mediocre lawyer|fastidious counsel]]. For example: | Expect to see some amendments to this clause, chiefly to appease [[Mediocre lawyer|fastidious counsel]]. For example: |