This is the scenario I discussed last week. The PB is on both
sides of the trade as legal entity; only the settlement account is different.
One of these will be for the trading desk at the bank (say JPM), the other’s
beneficiary will be the hedge fund’s.
From: mtf@xxxxxxxx [mailto:mtf@xxxxxxxx] On
Behalf Of Robert Stowsky
Sent: Friday, March 07, 2008 4:45 PM
To: mtf@xxxxxxxx
Subject: Re: Agency trades
Matthew,
I think you read to much into my questions. You have stated there is a
scenario where JPM will be on both sides of a trade. To me this
means for each leg of an interest rate swap JPM is both payer and
receiver. At this point I am not interested in any other roles associated
with the trade, but only with who are the known payer and receiver parties at
the time the trade is entered into.
Robert
matthew.d.rawlings@xxxxxxxxxxxx
wrote:
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:
- 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.
- 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.
- 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.
- 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
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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Brook Path Partners, Inc.
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