Re: Agency trades

[matthew.d.rawlings@xxxxxxxxxxxx]

Robert -

There are many possible scenarios where
a Prime Broker takes on different combinations of roles. This is also the
same as fund management, but still very rare in fund management. The exact
roles the Prime Broker fulfils are determined between the HF and PB, and
they are free to vary them. I'll take one of the possible combinations
for an explanation.

*In this example Hedge Fund "Firethorn"
trades using the name of Bank "Jodrell" as the creditor. Firethorn
uses Jodrell's name to access Jodrell's AAA credit rating, so Jodrell can
get a better price. Firethorn wants an IRS on $/Yen, and gets quotes from
the market. When getting quotes Firethorn has to say Firethorn is the Executor,
as the market price takes into account Firethorn's sophistication by charging
a higher price. Firethorn's funds are the Beneficiary for its side of the
Trade. When getting quotes Firethorn also has to say either it is trading
with a AAA credit rating or give the name of Jodrell Bank. Jodrell is the
Creditor on Firethorn's side of the trade because the name Jodrell will
go on the Contract and carry the credit risk. Firethorn hits a quote from
Bank "Asur" and a bargain is struck (trade executed). Firethorn
is now the Executor on its side of the trade because it executed the trade.
Firethorn could either decided to be the Affirmer and Confirmer for its
side of the trade or it could pass it to someone else. In this case it
decides to pass the affirming and confirming to one of its prime brokers
Jodrell Bank. So now Jodrell is the Affirmer and Confrmer of the trade
for Firethorn's side of the trade. Firethorn runs two funds, Roof Fund
and Remont Fund. Firethorn has instructed Asur and Jodrell to allocate
the IRS 50:50 across the funds. Jodrell makes the affirmation and confirmation
successfully with Asur. For Settlement Jodrell passes the Settlement to
its custody arm, Jodrell Custody Services. Firethorn has a Third Party
Administrator named Bank Chagos that runs accounting for its funds. Both
the Prime Broker (Jodrell), and Chagos will do accounting for the Trade.

* names are anonymized. They are deliberately
not meant to be passable.

The result is:

Role	Firethorn's Trade Side - side #1	Asur's Trade Side - side #2
Executor (executes the deal)	Firethorn	Asur
Creditor (credit risk and contract name)	Jodrell	Asur
Beneficiary	Remont Fund Roof Fund	Asur
Affirmer	Jodrell	Asur
Confirmer	Jodrell	Asur
Settler	Jodrell Custody Services	Asur
Accountant	Chagos Jodrell	Asur

One alternative outcome would be if
Jodrell's Proprietary Trading desk had provided the best quote to Firethorn,
and then Firethorn had executed the Trade with Jodrell.

Role	Trade Side #1	Trade Side #2
Executor (executes the deal)	Firethorn	Jodrell
Creditor (credit risk and contract name)	Jodrell	Jodrell
Beneficiary	Remont Fund Roof Fund	Jodrell
Affirmer	Jodrell	Jodrell
Confirmer	Jodrell	Jodrell
Settler	Jodrell Custody Services	Jodrell
Accountant	Chagos Jodrell	Jodrell

One alternative outcome would be if
a fund manager "Denis" executed with Firethorn. They were acting
for the Mold Pension Fund, and using Trust Bank International (TBI) as
their agents for their Middle Office and Operations, except for Trade Affirmation
which they kept in house.

Role	Trade Side #1	Trade Side #2
Executor (executes the deal)	Firethorn	Denis
Creditor (credit risk and contract name)	Jodrell	Mold Pension Fund
Beneficiary	Remont Fund Roof Fund	Mold Pension Fund
Affirmer	Jodrell	Denis
Confirmer	Jodrell	TBI
Settler	Jodrell Custody Services	TBI
Accountant	Chagos Jodrell	TBI

To answer Robert's questions:

1. Agency is a legal term used to define a contractual relationship where the Agent may enter into agreements with 3rd Parties on behalf of a Principal. Most forms of agency have nothing to do with agency trades. Appointing a prime broker as your agent for confirming trades has no overlap with agency trading. Power of attorney and Agency Law are not equivalent - for example Jodrell is Firethorn's agent, but does not have power of attorney.
2. Agency agreements have a specific scope. Firethorn appointed Jodrell as agent for Confirming that trade. Firethorn also appointed Chagos as agent for Accounting. To say "Jodrell is Firethorn's agent" is not specific enough. In this case Jodrell was agent for a number of Roles.
3. The beneficiaries may or may not be known at the time of the trade. In some jurisidictions allocations must be known in advance to provent "baby funds" or "baby syndicate" fraud. Normally there is a KYC process for significant business.
4. The creditors may or may not be known at the time of the trade. Some markets just want the characteristics, such as the credit risk, others don't care, and some want specific names. Invariably what people always want to know is the Executor, because they want to know who is doing what in the market as this affects price.

I answered the questions. I have one
point to make of my own: At no point in any message flow do you ever see
all these roles. There should be separate messages for Trade Execution,
Affirmation, Confirmation, Accounting, Custody, Settlement, Payment, Quotes,
Orders, etc.. This is only the global picture for a 'Trade'. We would be
better off saying which roles appear in which business processes. The reason
we see them all here is because the Business Process part of FpML is immature,
and so we have people sending "TradeCreated, TradeAmended" for
far too many business processes. If we could fix the business proces then
we'd still have TradeSide, we just wouldn't use all of it in every Trade
Message.

Matthew Rawlings 
+44 7917 596 827

Robert Stowsky <rstowsky@xxxxxxxxxxxxx>
Sent by: mtf@xxxxxxxx

07/03/2008 19:04

Please respond to
mtf@xxxxxxxx

To	Matthew Rawlings <matthew.d.rawlings@xxxxxxxxxxxx>
cc	mtf@xxxxxxxx
Subject	Agency trades

Matthew,

Three questions for my own clarity regarding JPM taking both sides of a
trade:

1)  Is this JPM acting as agent for Party A entering an agreement
with 
JPM acting as agent for Party B?
2) Is it known that one, or both sides are JPM  acting as agent?
3)  Are none, either, or both beneficiaries known at the time of the
trade?

Thanks.

Robert

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