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Synthetic prime brokerage: Difference between revisions
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{{a|PB|[[File:SES Google.png|450px|thumb|center|The internet's leading authority on [[synthetic equity swap]]s.{{tm}}]]}}{{a|glossary|}}''Also called a [[synthetic equity swap]], a [[contract for difference]] or a [[high-delta equity derivative]].''<br> | {{a|PB|[[File:SES Google.png|450px|thumb|center|The internet's leading authority on [[synthetic equity swap]]s.{{tm}}]]}}{{a|glossary|}}''Also called a [[synthetic equity swap]], a [[contract for difference]] or a [[high-delta equity derivative]].''<br> | ||
[[Prime brokerage]] done with [[derivatives]]. So : | [[Prime brokerage]] done with [[derivatives]]. So : | ||
*'''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 (cough, in all probability) buy the physical {{eqderivprov|shares}} and hold them in its own inventory as a [[delta-one]] hedge. But it will do this across its whole book, not client-by-client, much less position-by-position, and it will finance those shares in the market to offset its funding costs, so you shouldn’t imagine your prime broker keeps a little bucket with your name on it containing all the shares it has bought to hedge your swaps<ref>This might, at first, seem a bit upsetting, but once you talk to your tax accountant you will feel much better. This really is as much for your own good as for your [[prime broker]]’s.</ref>. You will be exposed to the price of the assets, but do not control or own the {{tag|prime broker}} | *'''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 (cough, in all probability) buy the physical {{eqderivprov|shares}} and hold them in its own inventory as a [[delta-one]] hedge. But it will do this across its whole book, not client-by-client, much less position-by-position, and it will finance those shares in the market to offset its funding costs, so you shouldn’t imagine your prime broker keeps a little bucket with your name on it containing all the shares it has bought to hedge your swaps<ref>This might, at first, seem a bit upsetting, but once you talk to your tax accountant you will feel much better. This really is as much for your own good as for your [[prime broker]]’s.</ref>. You will be exposed to the price of the assets, but do not control or own the {{tag|prime broker}}’s hedge. This can sometimes lead to disappointment when it comes to voting and [[corporate action]]s, but it’s all for the best. | ||
*'''Going [[short]]''': instead of borrowing shares from your [[PB]] and [[Short selling|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 [[Stock loan|borrow]] the shares for its own hedge and sell them short, and will pass on the cost of the [[stock borrow]] to you (by deducting it from the floating rate). | *'''Going [[short]]''': instead of borrowing shares from your [[PB]] and [[Short selling|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 [[Stock loan|borrow]] the shares for its own hedge and sell them short, and will pass on the cost of the [[stock borrow]] to you (by deducting it from the floating rate). | ||