Template:M intro isda Party A and Party B: Difference between revisions

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 Being ''so'' generic, the “Party A” and “Party B” labels can lead to practical difficulties: a [[dealer]] with thirty thousand counterparties wants to be “Party A” every time, just for peace of mind and literary continuity when perusing its collection of Schedules, as we know [[dealer]]s on occasion are minded to do.<ref>They are not.</ref> This is not just a matter of having to play in your change strip every now and then: if, here and there, a dealer must be “Party B” having lost the toss to a counterparty who also insists on being Party A, this can lead to anxious moments, should one have momentarily forgotten the switch during the negotiation and assigned your carefully-argued infinite [[IM]] {{csaprov|Threshold}} to the other guy.
-Frights like this are, in their way, quite energising, if you pick them up during the “four eyes check” at the conclusion of [[onboarding]].<ref>You won’t.</ref> Less so when Briggs J catches them for you in a judgment from the commercial division of the High Court.<ref>He will.</ref>
+Frights like this are, in their way, quite energising, if you pick them up during the “four eyes check” at the conclusion of [[onboarding]].<ref>You won’t.</ref> Less so, when Briggs J catches them for you in a judgment from the commercial division of the High Court.<ref>He will.</ref>
 ==== “BINO” — bilateral in name only ====
-{{Smallcaps|But there is}} a better objection: for all our automatic protestations to the contrary, the ISDA is not ''really'' a symmetrical contract of equals. It ''is'' often a financing contract, in economic effect, even if not in formal structure. Where one party is an [[end user|customer]] gaining exposure to a market risk and the other is a dealer providing [[Delta hedge|delta-hedged]] exposure to that risk, a swap is a sort of “[[synthetic loan]]”.
+{{Smallcaps|But there is}} a better objection: for all our protestations to the contrary, the ISDA is not ''really'' a symmetrical contract of equals. It ''is'' usually, a [[financing contract]], in economic effect, even if not in [[formal]] structure. Where one party is an [[end user|customer]] gaining exposure to a market risk, and the other is a market professional [[dealer]] providing [[Delta hedge|delta-hedged]] exposure to that risk, a swap is a sort of “[[synthetic loan]]”.
-Realising this may change how you think about ISDA negotiation. This thought grew and grew and now there is a [[A swap as a loan|whole new article about it]].
+Realising this may change how you think about ISDA negotiation. It did for the [[JC]]. So profound did this thought seem that it grew and grew and now there is a [[A swap as a loan|whole new article about it]].
-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 is, economically, a principal: it provides the impulse to trade; it elects when to exercise options and terminate positions. The [[dealer]] is, economically even if not legally, an agent: it hedges, calculates values and is burdened with additional [[regulatory capital]] charges if it doesn’t get its [[close-out netting]] right.
+Because, except for a narrow class of [[Inter-dealer|inter-dealer]] swap relationships, {{isdama}}s are dealer-customer [[relationship contracts]] and these are “bilateral” only in ''name'': the [[swap dealer|dealer]] ''provides'' exposures to [[end user|customers]],  who consume them. The customers are, economically, principals: they provide the impulse to trade; they elect when to exercise options, they decide when to terminate positions. The [[dealer]] is — economically, even if not legally — an agent: it hedges, calculates values and is burdened with additional [[regulatory capital]] charges if it doesn’t get its [[close-out netting]] right. But, as long as the customer stays solvent, ''it is not on risk''.
-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, because ''the customer is always right''. At least one swap dealer solved this problem by deciding to be “Party B” as standard. This only confused customers who were unused to being “Party A”.
-Furthermore, when labouring over some neatly [[iatrogenic]] [[co-calculation agent]] fallback dispute mechanism — and be assured, you will spend far more time doing this than can ever be justified by your reward for it, in heaven or on earth — it is easy to get your “[[Party A]]s” and “[[Party B]]s” mixed up. Doing so buries, deep in the [[fossil record]], a technical deficiency that may go entirely unrecognised for ''decades''.
+Furthermore, when labouring over some neatly [[iatrogenic]] [[co-calculation agent]] fallback dispute mechanism — and be assured, you will spend far more time doing this than can ever be justified by your reward for it, in heaven or on earth — it is easy to get your “[[Party A]]s” and “[[Party B]]s” mixed up. Doing so buries, deep in the [[fossil record]], a technical deficiency that may go unrecognised for ''decades''.
-Roll forward eighteen years. The world is again on the brink of financial [[Apocalypse]]. The customer is now a [[systemically important financial institution|systemically-important]] leviathan, largely thanks to years of optimistically lax credit sanctioning. But suddenly, it is teetering. The [[Credit officer|chief credit officer]] runs about with her hair on fire and for the first time, ''everyone is staring forensically at the docs''. Suddenly that co-calculation agent fallback dispute mechanism is all that stands between the firm and a three billion dollar abyss. And guess what? ''Some clot transposed “Party A” and “Party B”''.
+Roll forward eighteen years. The world is again on the brink of financial [[Apocalypse]], as Slovenian drones overwhelm the port of Stuttgart. The customer — a Slovakian off-balance sheet financing vehicle, is now a [[systemically important financial institution|systemically-important]] leviathan, largely thanks to years of optimistically lax credit sanctioning. But it is teetering. The [[Credit officer|chief credit officer]] runs about with her hair on fire and, for the first time, ''everyone is staring forensically at the docs''. Suddenly that [[co-calculation agent]] fallback dispute mechanism is all that stands between the firm and a three billion dollar abyss. And guess what? ''Some clot transposed “[[Party A]]” and “[[Party B]]”''.
 ====The real distinction: [[dealer]] and [[customer]]====
-{{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.<ref>Almost all {{isdama}}s will be between a ''customer'' and a ''dealer''. A few will be [[inter-dealer]] — but there are only so many dealers. Almost ''none'' will be inter-customer. I know, I know: the first ever swap was, though, right?</ref> The asymmetry comes not from whether one is [[long]] or [[short]], or buyer or seller, but from who is ''customer'' and who is ''dealer''.
+{{smallcaps|Beyond that small}} class of [[inter-dealer]] swap agreements that make up a [[dealer]]’s funding and hedging programme there ''is'' a material distinction between the parties to an swap contract.<ref>Almost all {{isdama}}s will be between a ''customer'' and a ''dealer''. A few will be [[inter-dealer]] — but there are only so many dealers. Almost ''none'' will be inter-customer. I know, I know: the first ever swap was, though, right?</ref> 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 — “[[end user]]” — uses the {{isdama}} to ''change'' its absolute exposure to a given risk or underlier. To take, or lay off, a risk.
-A [[dealer]] uses the {{isdama}} to earn a [[commission]]. It does this, yes, by providing its customers a changed absolute exposure, but at the same time carefully hedges that exposure so that, but for those fees, the dealer is market ''flat''. Now, it is the nature of the beast that a dealer can’t always ''stay'' market flat: it is too dependent upon the performance of its customers, counterparties and models for that — but this is not for want of trying.
+A [[dealer]] uses the {{isdama}} to earn a [[commission]] ''without'' taking on risk. It does this, yes, by providing its customers a changed absolute exposure, but at the same time hedges that exposure so that, but for those fees, the [[dealer]] is market ''flat''.
+Now, it is the nature of the beast that a [[dealer]] can’t always ''stay'' market flat: it is too dependent upon the performance of its customers, counterparties and models for that — but this is not for want of trying.
 ====Why does it matter?====