Template:M intro isda Party A and Party B: Difference between revisions

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Less energising are actual errors: as a group, [[negotiator]]s are redoubtable, admirable creatures but, like all of us fallible and prone to oversight: they may, by lowly force of habit, forget to invert the “Party” labels when inserting the boilerplate {{isdaprov|PPF Event}} rider for that one time in a thousand when the firm is not “Party A”. It is easily done, and just the sort of thing a [[four-eyes check]] will also miss: If it does, no-one will never know — ''unless and until it is too late''.
Less energising are actual errors: as a group, [[negotiator]]s are redoubtable, admirable creatures but, like all of us fallible and prone to oversight: they may, by lowly force of habit, forget to invert the “Party” labels when inserting the boilerplate {{isdaprov|PPF Event}} rider for that one time in a thousand when the firm is not “Party A”. It is easily done, and just the sort of thing a [[four-eyes check]] will also miss: If it does, no-one will never know — ''unless and until it is too late''.
===''Is'' it bilateral though?===
===''Is'' it bilateral though?===
But there is a better objection: for all our automatic protestations to the contrary, the ISDA is not ''really'' a bilateral contract, and it ''is'' often financing contract, in practical effect. Sort of a synthetic loan.
But there is a better objection: for all our automatic protestations to the contrary, the ISDA is not ''really'' a bilateral contract, and it ''is'' often financing contract, in practical effect. Sort of a synthetic loan.


We should not let ourselves forget: beyond the cramped star system of interdealer relationships, there is a boundless universe where one party is a “dealer” and the other a “customer”. This is the great preponderance of all ISDA arrangements. These roles are different. They do not depend on who is long and who is short. It behoves us not to forget that.  
We should not let ourselves forget: beyond the cramped star system of interdealer relationships, there is a boundless universe where one party is a “dealer” and the other a “customer”. This is the great preponderance of all ISDA arrangements. These roles are different. They do not depend on who is long and who is short, or who pays the fixed rate and who the floating. In each case there is a ''customer'' and a ''dealer''.
 
In recent years — ironically, just as the “dealer” vs “customer” dynamic has become more pronounced<ref>After the [[GFC]], bank proprietary trading fell away to almost nothing.</ref> — the global regulatory-industrial complex,<ref>This label is not just sardonic: there really is a cottage industry of of “regulatory change management professionals” who owe their last decade’s livelihood to ''accommodating'' quixotic regulatory initiatives like this. They are a powerful lobby with a direct interest in maintaining the rate of regulatory churn.<> still fighting last decade’s war, has forged rules which overlook this.
 
A notable example is the coordinated worldwide approach to regulatory margin.
 
Banks are independently capital regulated for solvency.


In recent years — ironically, just as the “dealer” vs “customer” dynamic has become more pronounced<ref>After the [[GFC]] bank proprietary trading fell away to almost nothing.</ref> — the global regulatory approach, still fighting last decade’s war, has kidded itself to the contrary.
Swap counterparties are sophisticated professionals with the tools and resources to monitor credit exposure to their brokers. (We take it that the [[financial weapons of mass destruction]] that these sophisticates truck in require more expertise than does weighing up the likely failure of a regulated financial institution).


One way it has done this is in the approach to regulatory margin.
It is a much better discipline for sophisticated counterparts to manage their credit exposure — spread it around, so to speak, than to require their banks to send hard cash out the door as collateral to clients with outsized exposures.  


Banks are independently capital regulated for solvency
Every dollar these banks pay away reduces the capital buffer the bank has available for everyone else.  It also provides the customer with free money on an unrealised [[mark-to-market]] position. This is like paying out while the roulette wheel is still spinning, in the expectation of where the ball might land. That is a loan: if the customer doubles down and loses, you don’t get your money back.


Swap counterparties are sophisticated professionals with the tools and resources to monitor credit exposure.
Daily mark to market moves are mainly noise. Yet this is what we collateralise. The signal emerges over a prolonged duration. Over the short run posted collateral can, as we know a system effect: if I double down on an illiquid position, it will tend to rise, and I will get more margin, and — this is the story of [[Archegos]].


It is a much better discipline for sophisticated counterparts to manage their credit exposure than to be given free leverage.


The increased systemic exposure of banks failing — which is what the margin regs were designed to address — is not caused by the banks themselves, but by their client exposures. Client exposures in turn are a function of client failures, which are in turn a function of leverage  
The increased systemic exposure of banks failing — which is what the margin regs were designed to address — is not caused by the banks themselves, but by their client exposures. Client exposures in turn are a function of client failures, which are in turn a function of leverage  
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