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Synthetic prime brokerage: Difference between revisions
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*'''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}}). | *'''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 | *'''[[Tax]] Risk and the famous [[hypothetical broker-dealer]]''': 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. | ||
Since the advent of Section [[871(m)]] the practical value of the [[hypothetical broker-dealer]] language — to butress your argument that this really is a [[high-delta equity derivative]], and not a disguised cash trade, has diminished, but it has not vanished entirely, so I am afraid you will need to persevere with it. | |||
===How [[synthetic equity swaps]] are traded=== | ===How [[synthetic equity swaps]] are traded=== | ||
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*'''You can change [[initial margin]] whenever you like? What’s ''that'' all about?''' | *'''You can change [[initial margin]] whenever you like? What’s ''that'' all about?''' | ||
*'''What do you mean you want a thirty day termination right?''' | *'''What do you mean you want a thirty day termination right?''' | ||
*''' | *'''[[Hypothetical broker-dealer]]. What’s ''that'' all about?''' (In brief: See Section [[871(m)]]). | ||
*'''Hang on. An [[indemnity]] for your tax risk? Are you serious?''' | *'''Hang on. An [[indemnity]] for your tax risk? Are you serious?''' | ||
{{seealso}} | |||
*[[871(m)]] of the [[Internal Revenue Code of 1986]] | |||
*[[Hypothetical broker-dealer]] | |||