The bilaterality, or not, of the ISDA: Difference between revisions
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{{a|isda|}}Unlike many financing documents, the {{isdama}} eschews understandable terms for its participants — ones that help you orient who is who: you know, like “Borrower” and “Lender”; “Bank” and “Client”; or “Buyer” and “Seller” — for the decidedly more gnomic “{{isdaprov|Party A}}” and “{{isdaprov|Party B}}”. | {{a|isda|}}Unlike many financing documents, the {{isdama}} eschews understandable terms for its participants — ones that help you orient who is who: you know, like “Borrower” and “Lender”; “Bank” and “Client”; or “Buyer” and “Seller” — for the decidedly more gnomic “{{isdaprov|Party A}}” and “{{isdaprov|Party B}}”. | ||
===But ''does'' it?=== | |||
The first thing to notice is that, actually, the {{isdama}} itself does ''not'' use the terms “Party A” and “Party B”. They only arrive in the {{isdaprov|Schedule}}, and then are only of use to distinguishing between the different covenants, details, agents and terms so it is clear which of them applies to one side and which to the other. The ISDA proper, being genuinely bilateral, never has to speak of {{isdaprov|Party A}} or {{isdaprov|Party B}}, because they are arbitrary assignations for clarity. General terms in the {{isdama}} apply equally to both of them. | |||
And note: the ''actual'' distinction between the parties; the ''real'' source of their asymmetry, is not whether one is long or short, or buyer or seller: any prudent risk manager will need to do both from time to time — much less whether Party A or B — but whether a given party is using the {{isdama}} to ''change'' its absolute exposure to this risk or that underlier — that person we call a “customer” or “end user” — or to earn a [[commission]] provide someone ''else'' a changed absolute exposure, while at the same time carefully hedging that exposure out so that, but for those fees, the party is market ''flat''. This sort of person we call a swap “dealer” or “broker”. (It is the nature of the beast that a dealer can’t always ''stay'' market flat: it is too dependent upon the creditworthiness of its customers and hedge counterparties for that — but this is not for want of trying. | |||
In any case almost all {{isdama}}s will be between a ''customer'' and a ''dealer''. A few will be inter-dealer. Almost ''none'' will be inter-customer. | |||
===Etymology=== | ===Etymology=== | ||
This derives from a working theory that gripped the [[First Men]] as they forged the [[deep magic]] that become the [[First ISDA]]: “a swap contract,” they intoned, “is an equal opportunity sort of an affair; Biblically, righteous in that one is neither a lender nor a borrower under it, but a ''counterparty''”. A counterparty is [[cunisian]]: neither one thing nor the other, but infused with glorious ''possibilities''. Either fellow may owe or be owed; each has, in theory, the same likelihood as the other of being ''[[in-the-money|in]]'' or ''[[out-of-the-money]]''. This is a bilateral relationship. | This derives from a working theory that gripped the [[First Men]] as they forged the [[deep magic]] that become the [[First ISDA]]: “a swap contract,” they intoned, “is an equal opportunity sort of an affair; Biblically, righteous in that one is neither a lender nor a borrower under it, but a ''counterparty''”. A counterparty is [[cunisian]]: neither one thing nor the other, but infused with glorious ''possibilities''. Either fellow may owe or be owed; each has, in theory, the same likelihood as the other of being ''[[in-the-money|in]]'' or ''[[out-of-the-money]]''. This is a bilateral relationship. | ||
Revision as of 22:29, 31 May 2023
Unlike many financing documents, the ISDA Master Agreement eschews understandable terms for its participants — ones that help you orient who is who: you know, like “Borrower” and “Lender”; “Bank” and “Client”; or “Buyer” and “Seller” — for the decidedly more gnomic “Party A” and “Party B”.
But does it?
The first thing to notice is that, actually, the ISDA Master Agreement itself does not use the terms “Party A” and “Party B”. They only arrive in the Schedule, and then are only of use to distinguishing between the different covenants, details, agents and terms so it is clear which of them applies to one side and which to the other. The ISDA proper, being genuinely bilateral, never has to speak of Party A or Party B, because they are arbitrary assignations for clarity. General terms in the ISDA Master Agreement apply equally to both of them.
And note: the actual distinction between the parties; the real source of their asymmetry, is not whether one is long or short, or buyer or seller: any prudent risk manager will need to do both from time to time — much less whether Party A or B — but whether a given party is using the ISDA Master Agreement to change its absolute exposure to this risk or that underlier — that person we call a “customer” or “end user” — or to earn a commission provide someone else a changed absolute exposure, while at the same time carefully hedging that exposure out so that, but for those fees, the party is market flat. This sort of person we call a swap “dealer” or “broker”. (It is the nature of the beast that a dealer can’t always stay market flat: it is too dependent upon the creditworthiness of its customers and hedge counterparties for that — but this is not for want of trying.
In any case almost all ISDA Master Agreements will be between a customer and a dealer. A few will be inter-dealer. Almost none will be inter-customer.
Etymology
This derives from a working theory that gripped the First Men as they forged the deep magic that become the First ISDA: “a swap contract,” they intoned, “is an equal opportunity sort of an affair; Biblically, righteous in that one is neither a lender nor a borrower under it, but a counterparty”. A counterparty is cunisian: neither one thing nor the other, but infused with glorious possibilities. Either fellow may owe or be owed; each has, in theory, the same likelihood as the other of being in or out-of-the-money. This is a bilateral relationship.
BINO
But with the exception of that a class of inter-dealer swap relationships, most ISDA Master Agreements are “bilateral” only really in name: one party — the swap dealer, provides swap products to a client, who consumes them. The client provides the impulse to trade; the client elects when to exercise options and terminate positions. The dealer hedges calculates values, and is burdened with regulatory capital charges if it doesn’t get its close-out netting documentation right.
This has led to two kinds of bother: firstly a bit of a squabble as to who gets to be Party A and who Party B; since dealers set up their templates to assume they are one party and not the other, when immovable object meets irresistible force it can be unseemly. furthermore, when labouring over some neatly iatrogenic co-calculation agent fallback dispute mechanism upon which your opponent is hotly insisting— you will spend far more time doing this than can ever be justified by the reward in heaven or on earth that you will get for going through the process — it is all to easy to get your “Party A” and “Party B” back to front, thus burying deep a technical deficiency that no-one will notice until, eighteen years later, when the world is nearing its next apocalyptic meltdown, the chief credit officer is running around with her hair on fire, and everyone is glaring at the docs team because the key goddamn protection has a drafting glitch in it.