Hedge Position Adjustments - Equity Derivatives Provision: Difference between revisions

Hedge Position Adjustments - Equity Derivatives Provision (view source)

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-{{a|eqderiv|{{hedge position adjustment}}}}
+{{a|eqderiv|{{hedge position adjustment}}}}Hedge Position Adjustments are a flourish you might see in a [[synthetic prime brokerage]] master confirmation, as a gloss to the other terms in the {{eqdefs}} about {{eqderivprov|Final Price}} and so on. As the sample in the box suggests they allow the dealer to pass through ''extraordinary'' costs of providing synthetic exposure to its clients. These chiefly take three forms: unexpected costs of hedging, the most  obvious of which are [[Stamp duty|stamp duties]], financial transaction taxes and other costs imposed on the dealer who hedges its obligations by transacting in the underliers; outright failures of the hedge (because hedge counterparties go bust before settling), and unexpected conversion costs.
-Hedge Position Adjustments are a flourish you might see in a [[synthetic prime brokerage]] master confirmation, as a gloss to the other terms in the {{eqdefs}} about {{eqderivprov|Final Price}} and so on.
+Clients, and their counsel, if [[ISDA ninja|schooled in the ways of the ninja]] will at first baulk, but there is method to the madness. Your starting proposition is this:
+{{quote|Remember this is only a market access product. This is just equity brokerage done with derivatives. The only reason, dear client, you aren’t actually buying the equity yourself, and thereby exposing yourself directly to these perfidious duties, taxes, counterparty failures and FX conversion costs, is because you can’t, or for your own reasons you have decided you would rather  have someone else — your [[dealer]] — on the register of shareholders instead of ''you''. Your [[dealer]] is gamely assuming all these risks and costs to give you exactly that exposure. It is only fair that you should agree to assume these risks.}}
+That will not immediately clinch it, but it should have your buyside advisors at least pausing for thought.
+Objections run along the following lines:
+“''Ok but how am I supposed to pass this on to my clients?''” This one specifically apposite for taxes that are imposed suddenly, out of the blue, and particularly retrospectively. Retrospective taxes are bad form, but there are some jurisdictions where consensus has it that they could happen: places like China, India, Taiwan, Morocco, Kazakhstan, Qatar and Romania. Who came up with this idiosyncratic list? Search us, but we suspect there are wounds and scar tissue behind it.
+It is certainly true that investors come and go, and it is hard for an investment manager to explain to a new investor in 2021 that her returns will be deprecated by some tax liabilities just incurred from a position closed in 2006, but why should this become the dealer’s problem? In practice dealers tend to be a bit phlegmatic: the real-world likelihood of retrospective taxes actually being imposed or enforced must surely decrease over time, so dealers will set arbitrary “sunset periods” of two, three or five years, and figure they will just wear any tail risk beyond that.
+“''I didn’t choose your hedge counterparties, so why should it be my problem if they blow up?''” Fair enough — but also, you ''did'' choose not to pick your own counterparties, but rather to leave it to your dealer, and who is to say you wouldn’t have chosen the same dealer? This one is far enough down the tail that people tend not to die in a ditch about it on either side of the argument.