A master swap contract is a simple and standardized contract created by the International Swaps and Derivatives Association in the late 1980s. In a standard master exchange agreement, the two parties involved in the transaction are identified. describes the terms of the agreement, such as payments, delays and cancellations; and exposes all the other legalities of the agreement. As has already been said, a traditional “long only” manager may not have the system and operational infrastructure to deal with short positions. Portfolio swaps relocate the operational overhead from short position management to counterparty. However, the swap holder remains responsible for providing trading instructions to the counterparty. OPCVM III authorized the use of short exposures (usually through the use of derivatives) to manage secondary risk and generate alpha. This has led traditional asset managers to use portfolio swaps to obtain a short-term commitment. Portfolio swaps give them the flexibility to invest in short positions without having to actually own them on their books. Like a mutual fund, the manager holds long assets and the portfolio swap.
The combined effect is the holding of long and short positions directly within the Fund. Please note that the OPCVM requires that the percentage of exposure allowed by a single consideration be limited. The actual amount varies between 5 and 10% of the fictitious instrument, depending on the type of derivative instrument and the institution acting as a counterparty. Portfolio swaps are well-suited to meet this requirement, as each deal can be structured to meet individual needs. The exchange of shares allows buyers to perceive only the difference in the price movements of the stock, index or portfolio. The Total Return Swap allows the buyer to receive price movements at the same time as dividends or other corporate shares on stocks, indices or portfolios. The use of portfolio swaps is increasing among investment managers. Subbiah Subramanian of Eagle Investment Systems explains the attractiveness and possible pitfalls in the use of portfolio swaps. The owner of a portfolio swap not only builds the basket, but can actively act on the items in the basket on a daily basis.
The counterparty can either trade on behalf of the officer or replicate the trading of other derivatives.