Equity v credit derivatives showdown: Difference between revisions

Equity v credit derivatives showdown (view source)

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 While not perfect — they get a bit gummed up about dividends, and tax can get complicated — the equity definitions do a serviceable enough job of describing what is essentially a straightforward product. It is mainly traded as [[delta-one]] exposures and, while hedging can be fraught in times of market dislocation (and hedging costs and losses get passed through to [[end user]]s, the basic notional value of an equity derivative is not: the market price of a listed share: you can see it printed in 6 point font in the Financial Times every morning, and printed on your Bloomie every second of the day.
-Credit derivatives specialists who come to the equity derivatives, as droves did after the collapse of the structured credit derivative market in 2008, ten
+Credit derivatives specialists who come to the equity derivatives, as droves did after the collapse of the structured credit market in 2008, tend to be surprised and alarmed at how straightforward and unfunky equity derivatives are. They are just not that fiddly. This is not for want of trying — hello [[hypothetical broker dealer]] — but you sense much of that is wanton complicationeering from our risk controller friends: in the decade following the financial crisis, the basic synthetic equity product became markedly ''more'' fiddly. No small part of that was fugitive structured credit lawyers overengineering through force of habit and ignorance. The ISDA ninja’s refrain: ''never hesitate to complicate''.
-d to be quite surprised and alarmed at how straightforward equity derivatives are. They are just not that fiddly. The decade following the crisis the basic synthetic equity product did become ''more'' fiddly, but a lot of that was refugee structured credit lawyers not knowing what they were doing. The ISDA ninja’s refrain: ''never hesitate to complicate''.
-Now while the equity product is ''structurally'' simple, you can just as easily lose your shirt, as [[Archegos]]’ [[prime broker]]s would tell you.
+Now, to be sure: while the equity swap product is ''structurally'' simple, it is no less ''risky'' for it, and you can just as easily lose your shirt, as [[Archegos]]’ [[prime broker]]s would tell you.
-As the saying goes, “if it ain’t broke, don’t fix it” and the market has remained loyal to the {{eqdefs}} despite a noble attempt by [[Flight 19]], a routine mission of Linklaters complexity bombers, to overhaul them in 2011, which failed rather epically. We have quite a bit of fun at their expense in these pages. As far as we know not a single trade has ever been documented under the [[2011 Equity Derivatives Definitions]]. If you happen to know of one, please ''don’t'' write in to tell us: that would spoil an impression of outright calamity we are quite happy labouring under.
+But unlike the dysfunctional credit derivatives definitions, it still mostly worked. As the saying goes, “if it ain’t really broke, don’t fix it”: the market has remained loyal to the {{eqdefs}} despite a noble attempt by [[Flight 19|a squadron of misguided Linklaters complexity bombers]] to overhaul them in 2011, which failed rather epically. We have quite a bit of fun at the expense of “[[Flight 19]]” but we mean well as, undoubtedly, they did too.
-By contrast the credit derivatives booklet has had quite the Odyssey. The latest version — the {{cddefs}} — are for the true connoisseur [[ISDA ninja]].
+But as far as we know, not a single trade has ever been documented under the [[2011 Equity Derivatives Definitions]]. If you happen to know of one, please ''don’t'' write in to tell us: that would spoil an impression of outright calamity we are quite happy labouring under.
-Their original abstract intellectual purity has long since evaporated,  brutalised by repeated, savage, real-world market dislocations. They are now a fearful, paranoid, jabbering wreck of gabbling cabbage. It is as if the winsome fever dream of some JP Morgan brainboxes, strained through the gusset of the [[First Men]] and then wrung out with some [[Potts Opinion|QC opinions]] has taken root, allowed to flourish, run wildly out of control, threatened life as we know it and then been mercilessly beaten, bent, twisted and hacked at by a community of embittered banking regulators, llthemselves branded by the white-hot iron of civilisation-threatening financial disaster.
+By contrast the credit derivatives booklet has had quite the Odyssey since the “long-hand” credit default swap product evolved in the late 1990s.
+In any case the latest version, the {{cddefs}}, is for the true connoisseur of iatrogenic [[ninjery]].
-Indeed, that is pretty much what ''did'' happen. It is not a pretty sight.
+Their original abstract intellectual purity has long since evaporated,  brutalised by repeated, savage, real-world market dislocations. They are now a fearful, paranoid, jabbering wreck of gabbling cabbage. It is as if the winsome fever dream of the JP Morgan brainboxes from whose brow they sprang, strained through the gusset of the [[First Men]] and then wrung out with some [[Potts Opinion|QC opinions]] has taken root, allowed to flourish, run wildly out of control, threatened life as we know it and then been mercilessly beaten, bent, twisted and hacked at by a community of embittered banking regulators, themselves branded by the white-hot iron of civilisation-threatening financial disaster.
-Credit default swaps emerged in the 1990s, the brainchild of JP Morgan boffins. They became highly fashionable and by 2003 had earned its own definitions booklet. As the [[CDO]] mania of the noughties reached fever pitch, the market felt a real need to develop standard terms for a CDS.
+Indeed, that is pretty much what ''did'' happen. It is not a pretty sight. Don’t look directly at the definition of {{cddprov|Event Determination Date}} without peril-sensitive sunglasses. It may blind you.
-At the same time legions of chancers, grifters and joiner-inners flooded the market and before you knew it there were all kinds of “exotic” structures, each more convoluted and less plausible than the last. Growth was periodically set back by actual credit events in the market, each its own life lesson about the multifarious ways in which over-engineered, too-clever-by-half structured products can surprise their Inventors and find unexpected ways to fail.
+Credit default swaps emerged in the 1990s, the brainchild of JP Morgan boffins. They became highly fashionable and by 2003 had earned their own definitions booklet. As the [[CDO]] mania of the noughties crested, the market felt a real need to develop standard terms for a CDS.
-The real “come-to-Jesus” moment for credit derivatives was the [[credit crunch]] of 2007 and then 2008’s full blown [[global financial crisis]],  which between them revealed the horrifying degree to which nice ideas in theory don’t hold up in the sweaty throes of market panic.  There was a ''lot'' of litigation about misfiring — or allegedly misfiring — credit derivatives. That has never really changed. The road to hell is, as they say, wallpaperered with [[CDS]] Confirmations. The credit derivatives have always been a bit of a moving feast.
+Just as it was doing this a cavalcade of chancers, grifters and joiner-inners flooded the market and before you knew it there were all kinds of “exotic” structures, each more convoluted and less plausible than the last. Growth was periodically set back by actual credit events in the market, each teaching its own life lesson about the multifarious ways in which over-engineered, too-clever-by-half structured products can surprise their Inventors and find unexpected ways to fail.
+The real “come-to-Jesus” moment for credit derivatives was the [[credit crunch]] of 2007 and then 2008’s full blown [[global financial crisis]],  which between them revealed the horrifying degree to which nice ideas in theory don’t hold up in the sweaty throes of market panic.  There was a ''lot'' of litigation about misfiring — or allegedly misfiring — credit derivatives. That has never really changed. The road to hell is, as they say, wallpapered with [[CDS]] Confirmations. The credit derivatives have always been a bit of a moving feast.
 As a result of their categorical failure to accommodate the various threnodies of the [[global financial crisis]] the {{cddefs}} were monstrously overhauled in 2014, while at the same time the product standardised yet further, moving away from single name, bilateral, privately negotiated transactions and towards cleared, standardised, broad-based index products.