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The bilaterality, or not, of the ISDA: Difference between revisions
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{{a|isda|}}Unlike many financing documents, the {{isdama}} eschews understandable terms for its participants — ones that help you orient who is who: you know, like “Borrower” and “Lender”; “Bank” and “Client”; or “Buyer” and “Seller” — for the decidedly more gnomic “{{isdaprov|Party A}}” and “{{isdaprov|Party B}}”. | {{a|isda|}}Unlike many financing documents, the {{isdama}} eschews understandable terms for its participants — ones that help you orient who is who: you know, like “Borrower” and “Lender”; “Bank” and “Client”; or “Buyer” and “Seller” — for the decidedly more gnomic “{{isdaprov|Party A}}” and “{{isdaprov|Party B}}”. | ||
===But ''does'' it?=== | |||
The first thing to notice is that, actually, the {{isdama}} itself does ''not'' use the terms “Party A” and “Party B”. They only arrive in the {{isdaprov|Schedule}}, and then are only of use to distinguishing between the different covenants, details, agents and terms so it is clear which of them applies to one side and which to the other. The ISDA proper, being genuinely bilateral, never has to speak of {{isdaprov|Party A}} or {{isdaprov|Party B}}, because they are arbitrary assignations for clarity. General terms in the {{isdama}} apply equally to both of them. | |||
And note: the ''actual'' distinction between the parties; the ''real'' source of their asymmetry, is not whether one is long or short, or buyer or seller: any prudent risk manager will need to do both from time to time — much less whether Party A or B — but whether a given party is using the {{isdama}} to ''change'' its absolute exposure to this risk or that underlier — that person we call a “customer” or “end user” — or to earn a [[commission]] provide someone ''else'' a changed absolute exposure, while at the same time carefully hedging that exposure out so that, but for those fees, the party is market ''flat''. This sort of person we call a swap “dealer” or “broker”. (It is the nature of the beast that a dealer can’t always ''stay'' market flat: it is too dependent upon the creditworthiness of its customers and hedge counterparties for that — but this is not for want of trying. | |||
In any case almost all {{isdama}}s will be between a ''customer'' and a ''dealer''. A few will be inter-dealer. Almost ''none'' will be inter-customer. | |||
===Etymology=== | ===Etymology=== | ||
This derives from a working theory that gripped the [[First Men]] as they forged the [[deep magic]] that become the [[First ISDA]]: “a swap contract,” they intoned, “is an equal opportunity sort of an affair; Biblically, righteous in that one is neither a lender nor a borrower under it, but a ''counterparty''”. A counterparty is [[cunisian]]: neither one thing nor the other, but infused with glorious ''possibilities''. Either fellow may owe or be owed; each has, in theory, the same likelihood as the other of being ''[[in-the-money|in]]'' or ''[[out-of-the-money]]''. This is a bilateral relationship. | This derives from a working theory that gripped the [[First Men]] as they forged the [[deep magic]] that become the [[First ISDA]]: “a swap contract,” they intoned, “is an equal opportunity sort of an affair; Biblically, righteous in that one is neither a lender nor a borrower under it, but a ''counterparty''”. A counterparty is [[cunisian]]: neither one thing nor the other, but infused with glorious ''possibilities''. Either fellow may owe or be owed; each has, in theory, the same likelihood as the other of being ''[[in-the-money|in]]'' or ''[[out-of-the-money]]''. This is a bilateral relationship. | ||