Master Confirmation Agreement
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Equity Derivatives Anatomy™
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An “MCA” is most likely to refer to a Master Confirmation Agreement - a series of ISDA standard form templates for executing Equity Derivatives between dealers. They are all set out on the ISDA website here
MCA is also a record label that annoyed Lynyrd Skynrd enough to write a song about them<ref>Lynyrd Skynrd, of course, for writing songs about people who annoyed them. Sweet Home Alabama is about the highly annoying — to an Alabaman — Neil Young.
Difference between synthetic PB and normal equity derivative master confirmations
Term, in a word. Under a normal equity derivatives MCA, the parties trade at arms length for a specified term, at the end of which both knows the trade terms out. So:
- The parties specifically agree to the trade up front — there is no sense of the “facility” nature of synthetic PB (even if that facility is technically uncommitted), where the broker more or less stands ready to take on any trade at the request of the client. Thus a broker under an MCA can assess the market at the time of trade and take a view for the duration how it feels about hedging risks, and perhaps price them into the trade.
- Initial margin may also be fixed.
- By contrast, in synthetic PB, the expectation is that the broker will put the trade on at the pre-agreed rates, and will keep it on until the client wants to take it off, whether that is over night or five years. Assessing the potential for market disruption is therefore more fraught, hence more flexibility in the ability to get out of a trade if hedging conditions unexpectedly change. While a broker will have a greater flexibility to adjust initial margin under a synthetic equity master confirmation, this doesn't impact the pricing of the risk per se. And there may well be a margin lock-up, meaning the broker can’t quickly get out of the trade.