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Synthetic prime brokerage: Difference between revisions
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*'''[[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. | *'''[[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. | ||
===How [[synthetic equity]] | ===How [[synthetic equity swaps]] are traded=== | ||
Unlike other derivatives, synthetic equity trades a lot like a [[cash equity]]: The client goes to a [[equity broker]] to get a firm indication, which the broker then “[[gives up]]” the thing that wasn’t actually an order in the first place (it’s complicated: see the box) to the [[prime broker]] who then, at the client's request, writes the swap at the price directed by the [[hedge fund]]. | |||
{{box| | |||
'''About give-ups''' <br> | |||
{{Equity giveup}} | {{Equity giveup}} | ||
}} | |||