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Hedging exemption: Difference between revisions
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===Repackaging SPVs=== | ===Repackaging SPVs=== | ||
And there is no better, cleaner, paradigmatic example of an entity that uses OTC derivatives to match income to outgoings than a [[Secured, limited recourse obligation|secured, limited recourse]] [[Repackaging programme|repackaging]] [[Special purpose vehicle|SPV]]. This is literally what | And there is no better, cleaner, paradigmatic example of an entity that uses OTC derivatives to match income to outgoings than a [[Secured, limited recourse obligation|secured, limited recourse]] [[Repackaging programme|repackaging]] [[Special purpose vehicle|SPV]]. This is ''literally'' what a [[Repackaging|repack SPV]] does with OTC derivative: no more; no less. Yet, at least according to one [[Magic circle law firm|magic circle]] [[law firm]],<ref>Which shall remain nameless</ref> the matter is “not free from doubt”. Yet, this firm struggles to explain the doubts it has: when you prod or poke at them, they tend to dissolve, like nasty toilet paper, at just the point where you might have wanted them. | ||
“A [[credit-linked note]], you see, doesn’t so much hedge a note, as the note hedges ''it''.” | “A [[credit-linked note]], you see, doesn’t so much hedge a note, as the note hedges ''it''.” | ||
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“... But the [[better view]] we think is, ah, it probably ''is'' a hedge. Perhaps a [[credit-linked note]] is not the best example.” | “... But the [[better view]] we think is, ah, it probably ''is'' a hedge. Perhaps a [[credit-linked note]] is not the best example.” | ||
“So what is | “So what ''is'' the best example?” | ||
“[[I have to hop]].” | |||
We wonder whether the firm might have committed itself to an outcome which on hindsight it realises is a bit potty, but polite comportment means it might now be a bit difficult to reverse-ferret out of. | |||
There are two ways of approaching this. One is a purposive approach, the other literalist. As is the collective wont, financial services professionals are a profoundly literalist, formalist bunch, so they lean hard into nuanced questions such as “would this qualify for hedge accounting under IFRS” or “can we say this is directly reducing risks directly relating to the financing activity of the SPV”, but failing to stand back and look at the bigger picture, which is to say “imposing a cash margining arrangement with a limited recourse SPV literally makes no sense”. | There are two ways of approaching this. One is a purposive approach, the other literalist. As is the collective wont, financial services professionals are a profoundly literalist, formalist bunch, so they lean hard into nuanced questions such as “would this qualify for hedge accounting under IFRS” or “can we say this is directly reducing risks directly relating to the financing activity of the SPV”, but failing to stand back and look at the bigger picture, which is to say “imposing a cash margining arrangement with a limited recourse SPV literally makes no sense”. | ||