For each of the scenarios below what is missing for me is who would be
specified as the payer/buyer and receiver/seller parties on each leg of
the deal.
Thanks,
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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