Commission: Difference between revisions
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Commission is only relevant to an [[ | Commission is only relevant to an [[agency]] contract. | ||
Where a broker acts as [[ | Where a broker acts as [[riskless principal]] (or any other kind of [[principal]]) there is NO commission: the payment we ''call'' a “[[commission]]” is really just an additional [[fee]]. | ||
For example, a real estate [[agent]] arranges a transaction between buyer and seller and is not in the contractual chain itself. Therefore one pays the purchase price to the seller, but the commission to the agent - look upon it as a derivative of the purchase price, even — though honestly that is slightly stretching the {{tag|metaphor}}. | |||
if you have legal, regulatory or — gasp — tax reasons for not wanting to have anything to do with a principal contract between your swap counterparty and its hedge counterparty, best call the amount you pay to your swap counterparty as consideration for its agreeing to put o the trade as a fee not a commission. | |||
[[Amwell J|My]] own view is that “a rose is a rose, and by any other name smells just as sweet” - but tax lawyers aren't so well read. | |||
Rationale: | Rationale: | ||
Revision as of 14:27, 26 April 2017
Commission is only relevant to an agency contract.
Where a broker acts as riskless principal (or any other kind of principal) there is NO commission: the payment we call a “commission” is really just an additional fee.
For example, a real estate agent arranges a transaction between buyer and seller and is not in the contractual chain itself. Therefore one pays the purchase price to the seller, but the commission to the agent - look upon it as a derivative of the purchase price, even — though honestly that is slightly stretching the metaphor.
if you have legal, regulatory or — gasp — tax reasons for not wanting to have anything to do with a principal contract between your swap counterparty and its hedge counterparty, best call the amount you pay to your swap counterparty as consideration for its agreeing to put o the trade as a fee not a commission.
My own view is that “a rose is a rose, and by any other name smells just as sweet” - but tax lawyers aren't so well read.
Rationale:
- Agency “Commission”: In a pure agency contract, there is no direct transaction between Agent and Principal, so the only way the agent can be remunerated is by a separate “agency fee”: this is a “commission” calculated on the value of the transaction between Street and the Customer directly to which the agent is not a party.
- Riskless Principal compensation: In a riskless principal structure there are two contracts: one between Street and Dealer, and between Dealer and Principal. Therefore Dealer may extract a fee by:
- Mark-up/Mark-down: imposing a mark up/mark down between the two contracts; OR
- Fee: separately charge a fee, which may be labelled a “commission”.