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And that would be fine, if it ''were'' like a ring-fenced repack. But it is not ''quite'': for one thing, poor swap dealer has no [[Security interest|security]] over the pool. It gets no “quid” for its “quo”. It is ''limited'' to that pool of assets, but it has no ''priority'' over them, as against other general creditors of the fund, as it would if it had security. It may find itself not only limited to the pool of assets but ''even then'' only recovering cents in the dollar on them. ''Double whammy''. You could fix that by having the fund represent that ''all'' other creditors are similarly limited to ''other'' pools of assets, so every creditor has its own dedicated bucket — but that is messy and unreliable. Are there really no other creditors? What about people claiming under a tort?<ref>Okay, I know, I am reaching here a bit. But still, the principle.</ref> Granting security is much cleaner and neater — but you’ll never get it. Somehow, asset managers have won this battle. Swap dealers the world over run this structural risk. One day this might come back to nip them on their bottoms, like an angry [[black swan]]. Who can say? | And that would be fine, if it ''were'' like a ring-fenced repack. But it is not ''quite'': for one thing, poor swap dealer has no [[Security interest|security]] over the pool. It gets no “quid” for its “quo”. It is ''limited'' to that pool of assets, but it has no ''priority'' over them, as against other general creditors of the fund, as it would if it had security. It may find itself not only limited to the pool of assets but ''even then'' only recovering cents in the dollar on them. ''Double whammy''. You could fix that by having the fund represent that ''all'' other creditors are similarly limited to ''other'' pools of assets, so every creditor has its own dedicated bucket — but that is messy and unreliable. Are there really no other creditors? What about people claiming under a tort?<ref>Okay, I know, I am reaching here a bit. But still, the principle.</ref> Granting security is much cleaner and neater — but you’ll never get it. Somehow, asset managers have won this battle. Swap dealers the world over run this structural risk. One day this might come back to nip them on their bottoms, like an angry [[black swan]]. Who can say? | ||
Note that the [[principal]] — or more likely the [[agent]] — is engaged in some dissembling here. So the [[principal]] wants its agent on a short leash. Fine; understood. Fair. But whose problem should ''that'' be? Who should carry the can when an [[asset manager]] exceeds its mandate, goes [[crazy-ape bonkers]], or just | Note that the [[principal]] — or more likely the [[agent]] — is engaged in some dissembling here. So the [[principal]] wants its agent on a short leash. Fine; understood. Fair. But whose problem should ''that'' be? Who should carry the can when an [[asset manager]] exceeds its mandate, goes [[crazy-ape bonkers]], or just ''royally messes up''? Not, we would submit, an arm’s length swap dealer trading [[in good faith]], for value and without notice of turpitude. The incentives are all wrong. Isn’t the [[principal]] going to be inclined to keep a tight rein on ''the value of that pool'', rather than, as it should, on its ''[[agent]]''? | ||
The general principles of agency, we submit, say this should be the [[principal]]’s problem. ''Choose your [[agent]]s wisely, and monitor them''. If not the [[principal]] (“I did! I even conducted [[due dilly]]! I monitored! Daily!”), then the ''[[agent]]''’. For if the agent’s own [[principal]] can’t be expected to have rooted out this canker, what chance did a poor old swap dealer have? | The general principles of agency, we submit, say this should be the [[principal]]’s problem. ''Choose your [[agent]]s wisely, and monitor them''. If not the [[principal]] (“I did! I even conducted [[due dilly]]! I monitored! Daily!”), then the ''[[agent]]''’. For if the agent’s own [[principal]] can’t be expected to have rooted out this canker, what chance did a poor old swap dealer have? | ||