82,911
edits
Synthetic prime brokerage: Difference between revisions
Jump to navigation
Jump to search
no edit summary
Amwelladmin (talk | contribs) No edit summary |
Amwelladmin (talk | contribs) No edit summary |
||
| Line 3: | Line 3: | ||
*'''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. | *'''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. | ||
*'''Going short''': instead of borrowing shares from your [[PB]] and selling them short | *'''Going short''': instead of borrowing shares from your [[PB]] and selling them short, you just put on a [[total return swap]], where you pay the return of the share price and the [[PB]] pays you a floating rate. Your PB will borrow the shares and sell them short, and will pass on the cost of the borrow to you (by deducting it from the floating rate). | ||
*'''Terminating''': | *'''Terminating''': You can terminate a synthetic position on any day, at market (subject to usual [[market disruption event|market disruption]] and [[Hedging Disruption|hedging disruption]] provisions (for more on this see our old friend the {{eqderivprov|triple cocktail}}). Thus you ''can'' make your [[prime broker]] liquidate its hedge, but you ''can’t'' make it to sell the hedge to you or any of your friends and relations (something it might not want to do if it has an investment banking relationship with the issuer and you are an activist {{tag|hedge fund}}). | ||
*'''[[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. | ||