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.
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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