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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]]. | 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]]. | ||
===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. | |||
Rationale | |||
*Agency | |||
*[[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: | *[[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 | **'''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”. | **'''Fee''': separately charge a fee, which may be labelled a “commission”. | ||
=== | {{box| | ||
'''Example''': A real estate [[agent]] arranges a transaction between vendor and purchaser. It is not in the [[contractual chain]] itself. Therefore one pays the purchase price to the [[vendor]], but the [[commission]] to the [[agent]] - look upon it as a [[derivative]] of the purchase price, if the fancy takes you — though honestly even I think that is to stretch the {{tag|metaphor}} a little. | |||
}} | |||
====Swaps==== | |||
Now: if you have [[legal]], [[regulatory]] or — gasp — [[tax]] reasons for not wanting to have anything to do with the [[principal]] contract between — say your [[swap counterparty]] and its [[hedge]], you are best advised to call the [[consideration]] you pay your [[swap counterparty]] for agreeing to pass the economics of its [[hedge]] to you a “[[fee]]”, because the counterparty is your counterparty in the contractual chain, and not a “[[commission]]”, which might be taken by mendacious minds in revenue departments to imply it was an [[agent]]. | |||
====Does it really matter?==== | |||
[[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. And heaven only knows what passes for literature for tax inspectors. | |||
{{seealso}} | |||
*[[Agent]] | *[[Agent]] | ||
*[[Principal]] | *[[Principal]] | ||
*[[Riskless principal]] | *[[Riskless principal]] |