Co-calculation agent

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There’s an old saying:

A co-calculation agent is no calculation agent.

However superficially neat this might seem to the age-old valuation dilemma of who should price the trade, it suffers in one important respect: unless the parties agree on the determination, the parties — er — won't agree on the determination. And then what do you do?

Dispute rights

Buyside counsel will delight in requesting elaborate dispute mechanisms, which they will have cribbed from their days as deal counsel on synthetic CDO squared deals, when they earned their fortunes penning cascading dispute provisions that would run for five unpunctuated pages. A couple of things to note:

Firstly, in those CDO squared the counterparty was, needless to say, the dealer’s own SPV, and it would neither seek a dispute provision, much less invoke one if it had it. That it did have one was an elaborate charade put on by the dealer for the sake of credulous ratings agencies, who laboured under the motivated irrationality of believing a calculation agent dispute right did a damn of good, and might meant that these piles of toxic waste could earn a AAA rating. I mean, just fancy.

Secondly, the disputability of derivative valuations, generally, falls into two camps: one one hand, those of liquid, publicly observable asset classes — such as those in the spot FX and listed equities markets — whose valuations derive from objectively-reported, independent market transactions and there isn’t really a great deal of scope for debate and, on the other, those that asset classes that comprise exotic, bespoke, “bull-market” transactions, which spring from the fevered imagination of credit structurers and depend on fantastical internal models of convexity curves, volatility smiles and other such exotic confections. These, no-one but the mad professor who confected them could calculate, much less want to, and for absolute certain the person employing said mad professor — the dealer — would not dream of allowing anyone else to second guess those calculation because upon them is predicated the very, colossal, PNL on which the trade is predicated.

See also

• Calculation Agent (ISDA Master Agreement)
• Calculation Agent (1995 CSA)
• Calculation Agent (2002 ISDA Equity Derivatives Definitions)

• Equity derivatives dispute rights