82,964
edits
Template:Isda Preamble summ: Difference between revisions
no edit summary
Amwelladmin (talk | contribs) No edit summary |
Amwelladmin (talk | contribs) No edit summary |
||
| Line 12: | Line 12: | ||
====Buy-side and sell-side==== | ====Buy-side and sell-side==== | ||
We will have more to say about this [[The bilaterality, or not, of the ISDA|in later essays]], but for the time being note that in most swap transactions there is a “sell-side” dealer and a “buy-side” end user to an {{isdama}}. There is a small class of “inter-dealer” swap contracts, but these generally do not create quite the same excitement as do | We will have more to say about this [[The bilaterality, or not, of the ISDA|in later essays]], but for the time being note that in most swap transactions there is a “sell-side” dealer and a “buy-side” end user to an {{isdama}}. There is, it is true, a small class of “inter-dealer” swap contracts, but these generally do not create quite the same excitement as do those between dealers and their customers. | ||
====“Dealer” versus “broker”==== | ====“Dealer” versus “broker”==== | ||
Swaps are inherently principal contracts, so the [[sell-side]] participant in a swap is always a “[[dealer]]”. ([[Broker]]s act as [[agent]]s to put a buyer and a seller together and charge a [[commission]]. [[Dealer]]s act as [[principal]], buying from a seller, and on-selling to a buyer, but the economic upshot of what they do in either case is the same.) | Swaps are inherently principal contracts, so the [[sell-side]] participant in a swap is always a “[[dealer]]”. ([[Broker]]s act as [[agent]]s to put a buyer and a seller together and charge a [[commission]]. [[Dealer]]s act as [[principal]], buying from a seller, and on-selling to a buyer, but the economic upshot of what they do in either case is the same.) | ||
Three important things to bear in mind about swap [[dealer]]s: | |||
{{l1}}'''They aspire to be market neutral''': Typically dealers provide market exposure to customers without taking a market position themselves.<li> | |||
'''They delta-hedge''': since a [[swap]] is inherently a principal-to-principal contract and not an [[Agent|agency]] arrangement, and entering ''does'' change the dealer’s market position, the dealer will execute offsetting [[delta-hedge]]s in the market to “flatten out” its position. It has quite a lot of flexibility in how it does this.<li> | |||
'''Dealers are regulated''': Because they are concentrated points of risk taken on by their customers, dealers are heavily regulated, both in terms of their conduct of business — with whom they can do business, and on what terms, and prudentially — in how they manage customer and market risk and how much capital they must hold. Their customers may be somewhat regulated, if they are investment funds, but generally the regulation is there to protect the “[[Ultimate client|ultimate client]]” a mythical grandpop who wants nothing more than to dandle his granddaughter on his knee while she blows upon a dandelion, and warm beams of sunshine bathe them all in holy light. </ol> | |||
''If'' dealers fail, it tends to be more or less apocalyptic for the market. But the market is getting better at managing the stress of dealer failures ([[Credit Suisse]] caused a lot less dislocation than did [[Lehman]]), and in truth [[dealer]]s do not fail that often. | |||
====Buy-side trade associations==== | ====Buy-side trade associations==== | ||