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Template:M intro isda Party A and Party B: Difference between revisions
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[[Party A and Party B - ISDA Provision|In this episode]] of the JC’s series of | {{D|Bilateral|/ˌbaɪˈlætᵊrᵊl/|adj}}Having, or relating to, two sides; affecting both sides equally. | ||
{{smallcaps|[[Party A and Party B - ISDA Provision|In this episode]]}} of the JC’s series of deep explorations of superficial things in the [[ISDA]] metaverse, we consider the “bilateral” nature of the {{isdama}} and its curious designators: “{{isdaprov|Party A}}” and “{{isdaprov|Party B}}”, and that curious descriptor of both of them: “[[counterparty]]”. | |||
These set the ISDA apart; give it a sort of otherworldly aloofness; a sense almost of social justice. Other banking and broking transactions use labels which help you orient who, in the [[power structure]], is who: a loan has a “Lender” (always the bank) and “Borrower” always the punter. A brokerage has “Broker” (master) and “Customer” (servant). | These set the ISDA apart; give it a sort of otherworldly aloofness; a sense almost of social justice. Other banking and broking transactions use labels which help you orient who, in the [[power structure]], is who: a loan has a “Lender” (always the bank) and “Borrower” always the punter. A brokerage has “Broker” (master) and “Customer” (servant). | ||
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===Bilaterality=== | ===Bilaterality=== | ||
A belief in even-handedness gripped the ones whose [[deep magic]] forged the runes from which the [[First Swap]] was born. | {{smallcaps|A belief in}} even-handedness gripped the ones whose [[deep magic]] forged the runes from which the [[First Swap]] was born. | ||
For most finance contracts imply some sort of dominance and subservience: a large institutional “have” indulging a small commercial “have-not” with debt finance for the privilege of which the larger “have” extracts excruciating covenants and enjoys a preferred place in the queue for repayment among the have-not’s many scrapping creditors. | For most finance contracts imply some sort of dominance and subservience: a large institutional “have” indulging a small commercial “have-not” with debt finance for the privilege of which the larger “have” extracts excruciating covenants and enjoys a preferred place in the queue for repayment among the have-not’s many scrapping creditors. | ||
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This thought grew and grew and now there is a [[A swap as a loan|whole new article about it]]. | This thought grew and grew and now there is a [[A swap as a loan|whole new article about it]]. | ||
====“BINO” — bilateral in name only==== | ====“BINO” — bilateral in name only==== | ||
But except for that a class of [[Inter-dealer|inter-dealer]] swap relationships, {{isdama}}s are “bilateral” only really in ''name'': one party — the [[swap dealer]], provides exposures to another, the customer, who consumes them. The customer provides the impulse to trade; the customer elects when to exercise options and terminate positions. The [[dealer]] hedges, calculates values and is burdened with additional [[regulatory capital]] charges if it doesn’t get its [[close-out netting]] right. | {{smallcaps|But except for}} that a class of [[Inter-dealer|inter-dealer]] swap relationships, {{isdama}}s are “bilateral” only really in ''name'': one party — the [[swap dealer]], provides exposures to another, the customer, who consumes them. The customer provides the impulse to trade; the customer elects when to exercise options and terminate positions. The [[dealer]] hedges, calculates values and is burdened with additional [[regulatory capital]] charges if it doesn’t get its [[close-out netting]] right. | ||
This has led to two kinds of bother: first, a bit of a squabble as to who gets to be Party A and who Party B; since [[swap dealer]]s set up their templates to assume ''they'' will be Party A and their customers Party B, when immovable object meets irresistible force it can spark an unseemly dispute from which the dealer will inevitably have to back down. At least one swap dealer solved this problem by deciding to be “Party B” as standard. This only confused clients who were unused to being “Party A”. | This has led to two kinds of bother: first, a bit of a squabble as to who gets to be Party A and who Party B; since [[swap dealer]]s set up their templates to assume ''they'' will be Party A and their customers Party B, when immovable object meets irresistible force it can spark an unseemly dispute from which the dealer will inevitably have to back down. At least one swap dealer solved this problem by deciding to be “Party B” as standard. This only confused clients who were unused to being “Party A”. | ||
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====The real distinction: [[dealer]] and [[customer]]==== | ====The real distinction: [[dealer]] and [[customer]]==== | ||
Beyond | {{smallcaps|Beyond that small}} class of [[inter-dealer]] swap contracts that make up a dealer’s funding and hedging programme — there ''is'' a material distinction between the parties to an swap contract. The asymmetry comes not from whether one is [[long]] or [[short]], or buyer or seller, but from who is ''customer'' and who is ''dealer''. | ||
A customer or “[[end user]]” uses the {{isdama}} to ''change'' its absolute exposure to a given risk or underlier. To take, or lay off, a risk. | A customer or “[[end user]]” uses the {{isdama}} to ''change'' its absolute exposure to a given risk or underlier. To take, or lay off, a risk. | ||
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====Why does it matter?==== | ====Why does it matter?==== | ||
What is in a name? | {{smallcaps|What is in}} a name? | ||
This may be to draw a long bow, but | This may be to draw a long bow, but you could argue that emphasising bilaterality has led the regulatory dance into the wrong corner of the dancefloor. The JC does. | ||
The logic is this: this is a contract of equals. Each poses an equal, but offsetting, risk to the other. Therefore credit concern cuts both ways, so any regulatory impositions should — ''must'' — also apply both ways. | The logic is this: this is a contract of equals. Each poses an equal, but offsetting, risk to the other. Therefore credit concern cuts both ways, so any regulatory impositions should — ''must'' — also apply both ways. | ||