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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|spb|{{Synthetic equity swap - FWMD}}}}{{quote|A contract in which one party makes payments based on a set rate while the other party makes payments based on the return of an underlying asset, in this case, stocks. A party that purchases a total return swap is, in effect making a bet on whether the underlying asset... will increase or decrease in value by the end of the term of the swap, Thus, if someone [takes] a long position in a swap, the counterparty to that swap will pay that person the amount of the increase in the price of the stock during the life of the swap contract if this price goes up, and the purchaser will pay the counterparty the amount of the decrease in the price of the stock during the life of the contract if the price goes down.
-[[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}}’s hedge. This can sometimes lead to disappointment when it comes to voting and [[corporate action]]s, but it’s all for the best.
+Furthermore, as BILL HWANG, the defendant and other [[Archegos]] conspirators understood, the [[Swap dealer|Counterparties]] generally did not enter into [[Synthetic equity swap|swap contracts]] with Archegos in order to bet on the increase or decrease of the stock price. Rather, the Counterparties did so to profit from the financing fees charged on the transaction. Accordingly,to avoid market exposure on a swap contract, the Counterparties themselves purchased the stock underlying the swap.
+:—''United States of America v Sung Kook (Bill) Hwang and Patrick Halligan'', Sealed Indictment 22 CRIM 240}}
+A topic of ''great'', sudden, interest in the wake of the [[Archegos]] scandal.
+''Also called [[portfolio swap]]s, [[synthetic equity swap]]s, [[contracts for difference]]<ref>This has been apt to confuse people; be warned.</ref> or [[high-delta equity derivative]]s.'' Cryptic crossword fans — JC has become addicted over lockdown — 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.
+Why are all these things called “[[synthetic prime brokerage]]”, then? Well, because economically this is ''physical'' [[prime brokerage]] — that is, [[Brokerage|equity brokerage]] done on [[margin lending|margin]] only done with ''[[swaps]]'' on [[shares]], and not ''actual'' [[shares]]. The client never actually owns the [[share]]: instead, his [[swap dealer]] buys it, and passes on the economic return under an [[equity derivative]].
+You may like our longer-form essay — it’s a contrarian piece, be warned —  ''“[[synthetic prime brokerage and the risk of tax recharacterisation]]”''.
+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 [[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).
 *'''Terminating''': You can terminate a synthetic position on any day, at market (subject to usual [[Market Disruption Event - Equity Derivatives Provision|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'' force 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}}), but of course it can if it wants to. Since — given the [[commercial imperative]] — it is highly incentivised to keep you happy, don’t by that surprised if the [[prime broker]] ''does'' want to sell you its hedge, but that this freaks out its [[compliance]] team, who will wish you just bought it in the market.
+===The tax issue===
+'''In short''', this is the '''[[tax]] risk and the famous [[hypothetical broker-dealer]]''': {{hypothetical broker-dealer capsule}}
-*'''[[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, and in the US, under [[871(m)]]) so it is important that your synthetic position doesn’t look like a play to avoid tax. Tax attorneys — especially american ones — will fret mightily if it does. One of the key indicators here will be the degree to which the contract permits you to influence or control your [[prime broker]]’s hedge. A derivative counterparty should care not one whit about its brokers hedge; if it takes an unhealthy interest, the [[fear]] will be that the swap position is [[recharacterised|really no more than]] a disguised custody arrangement of shares that you have actually bought, and should have paid tax on. Depending on which tax specialist you ask, this might extend even to your interest in the [[PB]]’s 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.
+Now, since the advent of Section [[871(m)]] the practical value of the [[hypothetical broker-dealer]] language — if it had any — has diminished since in most cases equity swaps are taxed consistently with physical share transactions. But<ref>Assuming, again, that it had any.</ref> it has not vanished entirely so, if your US tax people run true to the  [[JC]]’s experience, you may have to persevere with it. <br>
+'''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]]”
-Since the advent of Section [[871(m)]] the practical value of the [[hypothetical broker-dealer]] language — to buttress the argument that this really is a [[high-delta equity derivative]], and not a disguised cash trade, has diminished, but not vanished entirely, so I am afraid you will need to persevere with it. <br>
 {{LOSD under synthetic pb}}
 {{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.
 A client can close out its [[synthetic equity swap]] in exactly the same way: it obtains a firm price from an executing broker, instruct the closure of the swap at that price, and indicate that the [[PB]] can sell its hedge to the [[executing broker]].
-{{box|
-'''About give-ups''' <br>
-{{Equity giveup}}
-}}
-===Common points of dispute when negotiating a for [[synthetic equity swap]] [[master confirmation]] ===
+===Common, [[tedious]], negotiation 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'''” and “'''I want to be a {{eqderivprov|Determining Party}}'''”: See “I want to be [[co-calculation agent]]” and Section {{eqderivprov|12.7(c)}}.
-*'''I want a right to dispute your calculations''': See “I want to be [[co-calculation agent]]”
+*Why should you be able to pass on taxes, extraordinary hedge costs and other losses as a result of counterparty defaults on your hedge position? See {{eqderivprov|Hedge Position Adjustments}}.
 *'''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?'''
-{{seealso}}
+{{sa}}
+*[[Archegos]]
 *[[871(m)]] of the [[Internal Revenue Code of 1986]]
+*[[synthetic prime brokerage and the risk of tax recharacterisation]]
 *[[Hypothetical broker-dealer]]
+{{ref}}