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Synthetic prime brokerage: Difference between revisions
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{{a|PB| | {{a|PB| | ||
[[File:Synthetic equity swap.jpg|450px|thumb|center|[[A twisty spy technique]], yesterday.]] | [[File:Synthetic equity swap.jpg|450px|thumb|center|[[A twisty spy technique]], yesterday.]] | ||
}}''Also called a [[synthetic equity swap]], a [[contract for difference]]<ref>This has been apt to confuse people; be warned.</ref> or a [[high-delta equity derivative]].'' | }}''Also called a [[synthetic equity swap]], a [[contract for difference]]<ref>This has been apt to confuse people; be warned.</ref> or a [[high-delta equity derivative]].'' Why are all these things called “[[synthetic prime brokerage]]”, then? Well because economically this is ''physical'' [[prime brokerage]] — that is, equity brokerage done on [[margin lending|margin]] only done with [[swaps]] and not investments in actual shares. The client never actually owns the [[share]]: instead, his [[swap dealer]] buys it, and passes on the economic return. | ||
You may like our longer-form essay — it’s a contrarian piece, be warned — ''“[[synthetic prime brokerage and the risk of tax recharacterisation]]”''. | You may like our longer-form essay — it’s a contrarian piece, be warned — ''“[[synthetic prime brokerage and the risk of tax recharacterisation]]”''. | ||
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Crossword fans may also be thrilled to know how good “[[synthetic equity swap]]” is for generating anagrams. ''A twisty spy technique'', for example. Or ''witty, peachy inquests''. If you wanted to know ''why typist quit seance'', or have ever been dismayed by ''quite whiny typecasts'', this may be your inner [[equity derivative]] [[structurer]] banging on your cranium and trying to get out. | Crossword fans may also be thrilled to know how good “[[synthetic equity swap]]” is for generating anagrams. ''A twisty spy technique'', for example. Or ''witty, peachy inquests''. If you wanted to know ''why typist quit seance'', or have ever been dismayed by ''quite whiny typecasts'', this may be your inner [[equity derivative]] [[structurer]] banging on your cranium and trying to get out. | ||
Anyway. | |||
===Why ''synthetic'' and not ''physical''?=== | |||
*'''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 [[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. | ||
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'''The long version''': If that wasn’t compelling enough here, in a service to the market, is a longer form essay from the [[JC]] on ''“[[synthetic prime brokerage and the risk of tax recharacterisation]]” | '''The long version''': If that wasn’t compelling enough here, in a service to the market, is a longer form essay from the [[JC]] on ''“[[synthetic prime brokerage and the risk of tax recharacterisation]]” | ||
{{Synthetic equity swap - FWMD}} | |||
{{LOSD under synthetic pb}} | {{LOSD under synthetic pb}} | ||
{{Difference between SES and MCA}} | {{Difference between SES and MCA}} | ||
==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. | ||
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}} | }} | ||
===Common points of dispute when negotiating a | ===Common, [[tedious]], points of dispute when negotiating a [[synthetic equity swap]] [[master confirmation]] === | ||
*'''I want to be [[co-calculation agent]]''': | *'''I want to be [[co-calculation agent]]''': | ||
*'''I want a right to dispute your calculations''': See “I want to be [[co-calculation agent]]” | *'''I want a right to dispute your calculations''': See “I want to be [[co-calculation agent]]” | ||