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Synthetic prime brokerage: Difference between revisions
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*'''[[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. | *'''[[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. | 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. <br> | ||
{{{Difference between SES and MCA}} | |||
===How [[synthetic equity swaps]] are traded=== | ===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 price]] indication, the [[broker]] then “[[gives up]]” this 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]]. So the swap provider, which lives in the [[prime brokerage]] business, really is a glorified custodian. Cruel people would say that’s not a bad description of a [[prime broker]], come to think of it. | Unlike other derivatives, synthetic equity trades a lot like a [[cash equity]]: The client goes to a [[equity broker]] to get a [[firm price]] indication, the [[broker]] then “[[gives up]]” this 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]]. So the swap provider, which lives in the [[prime brokerage]] business, really is a glorified custodian. Cruel people would say that’s not a bad description of a [[prime broker]], come to think of it. | ||