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Template:M intro isda Party A and Party B: Difference between revisions
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This has led to two kinds of bother: first, a bit of a squabble as to who gets to be Party A and who Party B; since [[swap dealer]]s set up their templates to assume ''they'' will be Party A and their customers Party B, when immovable object meets irresistible force it can spark an unseemly dispute from which the dealer will inevitably have to back down. At least one swap dealer solved this problem by deciding to be “Party B” as standard. This only confused clients who were unused to being “Party A”. | This has led to two kinds of bother: first, a bit of a squabble as to who gets to be Party A and who Party B; since [[swap dealer]]s set up their templates to assume ''they'' will be Party A and their customers Party B, when immovable object meets irresistible force it can spark an unseemly dispute from which the dealer will inevitably have to back down. At least one swap dealer solved this problem by deciding to be “Party B” as standard. This only confused clients who were unused to being “Party A”. | ||
Furthermore, when labouring over some neatly [[iatrogenic]] [[co-calculation agent]] fallback dispute mechanism — and be assured, you will spend far more time doing this than can ever be justified by your reward, in heaven or on earth | Furthermore, when labouring over some neatly [[iatrogenic]] [[co-calculation agent]] fallback dispute mechanism — and be assured, you will spend far more time doing this than can ever be justified by your reward for it, in heaven or on earth — it is easy to get your “[[Party A]]s” and “[[Party B]]s” mixed up. Doing so buries, deep in the [[fossil record]], a technical deficiency that may go entirely unrecognised for ''decades''. | ||
Roll forward eighteen years. The world is again on the brink of financial [[Apocalypse]]. The customer is now a [[systemically important financial institution|systemically-important]] leviathan, largely thanks to years of optimistically lax credit sanctioning. But suddenly, it is teetering. The [[Credit officer|chief credit officer]] runs about with her hair on fire and for the first time, ''everyone is staring forensically at the docs''. Suddenly that co-calculation agent fallback dispute mechanism is all that stands between the firm and a three billion dollar abyss. And guess what? ''Some clot transposed “Party A” and “Party B”''. | Roll forward eighteen years. The world is again on the brink of financial [[Apocalypse]]. The customer is now a [[systemically important financial institution|systemically-important]] leviathan, largely thanks to years of optimistically lax credit sanctioning. But suddenly, it is teetering. The [[Credit officer|chief credit officer]] runs about with her hair on fire and for the first time, ''everyone is staring forensically at the docs''. Suddenly that co-calculation agent fallback dispute mechanism is all that stands between the firm and a three billion dollar abyss. And guess what? ''Some clot transposed “Party A” and “Party B”''. | ||
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Obliging dealers to [[Variation margin|cash-collateralise]] customers’ open positions creates the ''opposite'' incentives. Customers are encouraged not to diversify their risk, but to concentrate it, with the [[dealer]]s offering the most aggressive margin rates. And the dealer market is competitive to the point of being paranoid, as we learned from [[Archegos]]. Dealers will cut their required margins to the bone, thereby increasing their risk of loss. | Obliging dealers to [[Variation margin|cash-collateralise]] customers’ open positions creates the ''opposite'' incentives. Customers are encouraged not to diversify their risk, but to concentrate it, with the [[dealer]]s offering the most aggressive margin rates. And the dealer market is competitive to the point of being paranoid, as we learned from [[Archegos]]. Dealers will cut their required margins to the bone, thereby increasing their risk of loss. | ||
By contrast, [[end user]]s are not regulated. They are often thinly capitalised funds, trading with leverage on someone else’s money: guess who? ''The dealer''. | By contrast, [[end user]]s are not regulated. They are often thinly capitalised funds, trading with leverage on someone else’s money: guess who? ''The [[dealer]]''. | ||
The real source of systemic [[dealer]] risk | The real source of systemic [[dealer]] risk is the [[Second-order derivative|second-order risk]] presented by the dealer’s ''customers'' blowing up. | ||
This is a situation a dealer is more likely to get itself into if it has to pay away wodges of regulatory margin to collateralise un-realised | This is a situation a [[dealer]] is more likely to get itself into if it has had to pay away wodges of [[regulatory margin]] to collateralise its customer’s un-realised gains, giving those customers, already betting with the broker’s money, even more of it. We have a separate essay on this: See ''[[when variation margin attacks]]''. | ||
Might the market have gravitated this way were it not for our fiction of pretending this is a bilateral relationship? | Might the market have gravitated this way were it not for our fiction of pretending this is a bilateral relationship? | ||