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

Decentralised markets are not a stable equilibrium. <Ref>Sorry, cryptobros.</ref> Whenever many people seek to manage their risk in a distributed community, the opportunity arises for well-connected professionals to ''intermediate'': to bring together buyers and sellers and take a commission. Swaps are, by nature, principal-to-principal contracts, but the principle is the same: a small class of intermediaries aggregate, anonymise and ''transfer'' risks around the market, but they don’t, as far as they can help it, ''take'' risks. They are in it for the facilitation fees, and a financing spread. Their economic exposure to their customers, therefore, resembles a lender’s to its borrowers. Swap “dealers” are, effectively, ''providing finance''.  

Realising this may change how you think about ISDA negotiation. It did for the [[JC]]. We will develop this idea in future posts.

Because, except for a narrow class of [[Inter-dealer|inter-dealer]] swap relationships, all {{isdama}}s are dealer-customer [[relationship contracts]] and “bilateral” ''only in name'': [[swap dealer|dealers]] ''provide'' 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, as a part of the regulated financial system, 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''.