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[[Party A and Party B - ISDA Provision|In this episode]] of the JC’s series of unfeasibly deep explorations of superficially odd things in the ISDA metaverse, we look at the curious | [[Party A and Party B - ISDA Provision|In this episode]] of the JC’s series of unfeasibly deep explorations of superficially odd things in the [[ISDA]] metaverse, we look at the curious designators in the {{isdama}}: “Party A” and “Party B”, and that curious descriptor of both of them: “[[counterparty]]”. | ||
These set the ISDA apart; give it a sort of otherwordly aloofness. | These set the ISDA apart; give it a sort of otherwordly aloofness. | ||
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===Bilaterality=== | ===Bilaterality=== | ||
This derives from the belief in even-handedness that gripped the [[First Men]] who forged the [[deep magic]] from which the [[First Swap]] was born | This derives from the belief in even-handedness that gripped the [[First Men]] who forged the [[deep magic]] from which the [[First Swap]] was born. For most finance contracts imply some sort of dominance and subservience: a large institutional “have” indulging a small commercial “have-not” with debt finance for the repayment of which the larger “have” enjoys a privileged place in the queue for repayment among the have-not’s many scrapping creditors. | ||
But [[swaps]], as the [[First Men]] saw them, are not like that. | |||
“A swap contract,” they intoned, “is an exchange among peers. It is an equal-opportunity sort of thing; Biblically righteous in that, under its awnings, one be neither lender nor borrower, but an honest rival for the favour of the Lady Fortune, however capricious may she be. | |||
So we agree: for this relationship we will call you | “We are equals. Rivals. ''Counterparties''”. | ||
And, to be sure, swaps ''are'' different from loans and brokerage arrangements. They start off “at market” where all is square. Either party may be long or short, fixed or floating. At the moment the trade is struck, the world infused with glorious ''possibility''. One’s fortunes may rise or fall relative to the other fellow’s and, as a result, one may ''owe'' (“[[out-of-the-money]]”) or ''be owed'' (“[[in-the-money]]”). | |||
Now the {{isdama}} ''itself'' never uses the terms “Party A” or “Party B”. Being genuinely bilateral, it never has to. The labels are arbitrary assignations that apply at trade level. Thus, they only appear in the {{isdaprov|Schedule}} and in {{isdaprov|Confirmation}}s, to be clear who is who on a given trade: who pays the fixed rate and who the floating; which thresholds, maxima, minima, covenants, details, agents and terms apply to which counterparty. This much is necessarily different. Nothing beyond: the {{isdama}} assumes you already know who is who, having agreed it in the {{isdaprov|Schedule}}. | |||
So we agree: for this relationship we will call you “Party B”, and me “Party A”. | |||
These colourless and generic terms hark from a time where, we presume, the idea of “find and replace all” in an electronic seemed some kind of devilish black magic. | These colourless and generic terms hark from a time where, we presume, the idea of “find and replace all” in an electronic seemed some kind of devilish black magic. | ||
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[[Negotiator|Negotiators]], too, are prone to forget. This is just the sort of thing a [[four-eyes check]] will miss: when dropping in your {{isdaprov|PPF Event}} template rider for that one time in a thousand when you are not Party A, it is easy to forget to invert the labels. If you do forget, no-one will never know — ''unless and until it is way too late''. | [[Negotiator|Negotiators]], too, are prone to forget. This is just the sort of thing a [[four-eyes check]] will miss: when dropping in your {{isdaprov|PPF Event}} template rider for that one time in a thousand when you are not Party A, it is easy to forget to invert the labels. If you do forget, no-one will never know — ''unless and until it is way too late''. | ||
But there is a better objection: for all our automatic protestations to the contrary, the ISDA ''is not'' a bilateral contract, and it is a financing contract. We should not let ourselves forget: beyond the comparatively rare interdealer universe, there will be a “dealer” and there will be | But there is a better objection: for all our automatic protestations to the contrary, the ISDA ''is not'' a bilateral contract, and it ''is'' a financing contract. We should not let ourselves forget: beyond the comparatively rare interdealer universe, there will be a “dealer” and there will be | ||
a “customer”. Their roles are different, and it behoves us not to forget. In recent years — ironically, just as the dealer vs customer dynamic has become more pronounced — the global regulatory approach, still fighting last decade’s war, has kidded itself to the contrary. | a “customer”. Their roles are different, not depending on who is long and who is short, and it behoves us not to forget. | ||
In recent years — ironically, just as the dealer vs customer dynamic has become more pronounced — the global regulatory approach, still fighting last decade’s war, has kidded itself to the contrary. | |||