Give up

The original EGUS standard electronic give up was developed by the futures clearing merchant Stock, Aitken & Waterman

Never surrender.

A give up is, in practical theory, an arrangement whereby a hedge fund “gives up” pending transaction — be it a derivative or a cash trade — it has executed (or, cough, unsubtly hinted it is “highly interested” in executing) to its prime broker, who accepts the hedge fund’s contract with the executing broker on condition that it puts 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 none of them involve a contract which is “given up” as such. To make matters worse, the three methods are profoundly different in every respect.

ISDA Give Up

Under the 2005 ISDA Master Give-Up Agreement, a fund may “give up” derivatives it has traded with a broker to its Prime broker. It will usually do this because it does not have an ISDA Master Agreement with the 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 principal contract with the executing broker, but 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 Master Agreement 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 for a cash equity from an 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 on University Challenge before Bamber Gascoigne has finished asking the question: “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, no contract is ever “given up”. Note that in theory — even if not awfully often in practice — the prime broker can feign total ignorance and refuse to transact with the executing broker, thereby hanging the executing broker out to dry with any recourse against anyone for the equity trade it has executed. The equity broker may have words to the hedge fund client about this, of course, but not ones that would sound a claim in contractual damages.

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
• Important information about give-ups