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{{cocalculationagent}} | {{cocalculationagent}} | ||
===Disputing a Calculation Agent’s determinations=== | ===Disputing a Calculation Agent’s determinations=== | ||
One of the great old saws of negotiation in any capital markets transaction is ''what to do if you don’t like the number the Calculation Agent comes up with''. This springs from the ancient, primal fear that flutters in the breast of every [[buy-side legal eagle]] which is best articulated thus: All swap dealers are innately mendacious. They care for nothing but their own | One of the great old saws of negotiation in any capital markets transaction is ''what to do if you don’t like the number the Calculation Agent comes up with''. This springs from the ancient, primal fear that flutters in the breast of every [[buy-side legal eagle]] which is best articulated thus: ''All swap dealers are innately mendacious''. They care for nothing but their own profit. | ||
They will, thus, not pause to breathe before ripping clients’ faces from their skulls should the merest opportunity to do so arise. Derivatives, we know, are [[financial weapons of mass destruction]] even on a good day, so giving one of those dastardly dealers the unilateral right to determine values on the economic equivalent of an ICBM without any comeback would be ''insane''. Therefore I must have a mechanic to dispute a calculation that seems “off”. | |||
Now, to be fair, there was a time when in some markets swap dealers ''would'' rip off their clients’ faces at the merest opportunity. “Cheapest to deliver” options in managed CDO portfolios spring unhappily to mind. Banks used to “prop trade” a lot more than they do now. It is weird to trade derivatives with a bank you know is making directional money rather than accepting commissions. It has a stark conflict of interest. The Volcker rule has at least dampened that part of the market; the implosion of the world economy in 2008 killed off CDOs. | Now, to be fair, there was a time when in some markets swap dealers ''would'' rip off their clients’ faces at the merest opportunity. “Cheapest to deliver” options in managed CDO portfolios spring unhappily to mind. Banks used to “prop trade” a lot more than they do now. It is weird to trade derivatives with a bank you know is making directional money rather than accepting commissions. It has a stark conflict of interest. The Volcker rule has at least dampened that part of the market; the implosion of the world economy in 2008 killed off CDOs. | ||
That being as it may, traditionally, the dispute mechanism our learned friends confect boil down to seeking alternative prices from ''other'' “reference dealers”. The exact method can be baroque: appeals to law society presidents, competing panels of reference dealers, fallbacks if no prices are forthcoming, discarding outliers, splitting differences and so on, but in any case seems predicated on the idea that a disinterested market participant — who is still, remember, a rapacious dealer, just not one with a dog in the fight — will be less [[inclined]] to tear your face from the bone than the one with whom you have had a fruitful twenty-year relationship. This feels wishful. | |||
How strongly each feels about its right to ''query'' or ''dispute'' the {{isdaprov|Calculation Agent}}’s determinations will depend on the sort of products they’re expecting to trade: [[FX]] and simple [[equity derivative|equity derivatives]] have deep, liquid, observable markets, and as there’s little scope for picking a fight, a [[dealer]] {{isdaprov|Calculation Agent}} may not be bothered about ceding rights to dispute its calculations. Expect a different reaction should you seek to second-guess your [[dealer]]’s marks on exotic [[credit derivative|credit derivatives]], on the other hand. These rely enormously on the dealer’s internal models, pricing curves and other kinds of idiosyncratic financial [[bullshit|alchemy]] that are almost certainly unique to the [[dealer]] in question. | How strongly each feels about its right to ''query'' or ''dispute'' the {{isdaprov|Calculation Agent}}’s determinations will depend on the sort of products they’re expecting to trade: [[FX]] and simple [[equity derivative|equity derivatives]] have deep, liquid, observable markets, and as there’s little scope for picking a fight, a [[dealer]] {{isdaprov|Calculation Agent}} may not be bothered about ceding rights to dispute its calculations. Expect a different reaction should you seek to second-guess your [[dealer]]’s marks on exotic [[credit derivative|credit derivatives]], on the other hand. These rely enormously on the dealer’s internal models, pricing curves and other kinds of idiosyncratic financial [[bullshit|alchemy]] that are almost certainly unique to the [[dealer]] in question. | ||