Synthetic prime brokerage: Difference between revisions

{{anat|PB}}

*'''Going long''': instead of buying shares on [[margin]] and asking your [[prime broker]] to hold them for you, you just trade [[a total return swap]] with your [[prime broker]] where the PB pays the return of the share price and you pay a floating rate. The [[PB]] will buy the physical shares and hold them in its own inventory as a [[delta-one]] hedge. But note it will do this across its whole book, not client-by-client, much less position-by-position.You will be exposed to the price of the assets, but will not have any control or ownership over the {{tag|prime broker}}'s hedge. This can sometimes lead to disappointment when it comes to [[voting]] and [[corporate actions]], but it's all for the best.  

*'''[[Tax]] Risk''': In some jurisdictions, derivatives are taxed differently to equities (as regards [[stamp duty reserve tax]] for example) so it is important that your synthetic position doesn’t look like a tax play. One of the key ways it might do this is if you have contractual control over your [[prime broker]]’s hedge (in which case your swap position might be recharacterised as a disguised custody arrangement. Depending on which tax specialist you ask, this might extend even to the hedge execution price. Thus you will see much chatter about the termination price being the one a “hypothetical broker-dealer” might achieve selling fungible securities, and [[volume-weighted average price]]s and so on.