Give up

Never surrender.

A give up is in practical theory an arrangement whereby a pending trade between a hedge fund and an executing broker - be it a derivative or for a cash trade - is “given up” by the hedge fund to its prime broker, who accepts the fund's contract with the executing broker on condition that it can put on an economically identical off-setting transaction with the hedge fund.

It sounds, you might think, like some kind of novation. But oh, no. That would be far too sensible.

There are three normal ways of giving up, and ironically neither of them involve a contract which is “given up” as such.

• ISDA Give Up: under the 2005 ISDA Master Give-Up Agreement, derivatives traded under an ISDA Master Agreement may be given up to a Prime broker. Under this arrangement the hedge fund acts at all times as the prime broker’s agent (it may not be a client of the executing broker at all) and never creates its own contract with the executing broker - it simply arranges the contract between the executing broker and the prime broker. The PB then puts on a back-to-back trade with the HF under the ISDA between them. Net result: the PB intermediates between EB and HF. Calling this arrangement a “give-up” is something of a misnomer.
• Equity Give Up: Under a cash equity give-up, the hedge fund seeks a firm price indication from the executing broker, but does not act on it: rather, the hedge fund takes the quote and instructs its prime broker to do execute it — directing its attention to the winsome executing broker who is awaiting its call (in practice, the executing broker will “allege” the trade to the prime broker, which is rather like buzzing in to answer a question on University Challenge before Bamber Gascoigne has finished asking it: “a little birdie tells me you are going to instruct me to trade on an equity to hedge a swap you’re about to put on with your client hedge fund X. Well — here it is!”). Once the PB has traded with the EB, the PB creates a back-to-back transaction with its client, usually in the shape of an equity swap transacted under an ISDA Master Agreement. This one is a misnomer too, amusingly enough, since here, also, there is never a contract that is given up. Note that in theory — even if not awfully often in practice — the prime broker can feign total ignorance and refuse to transact, thereby hanging the executing broker out to dry with any recourse against anyone for the equity trade it has executed.
• ETD Give Up: Documented under the FIA standard giveup documentation, available free to the world, here. There is a Customer Version and a Trade Version of the Electronic Give-Up System (EGUS). The ETD give-up is the only one that functions as a real trade between client and executing broker and then a novation of that trade from client to clearing broker, at which point a back-to-back transaction springs into life between the clearing broker and the client.

See Also

• 2005 ISDA Master Give-Up Agreement