Question : Equity SwapsAutres29/10/2010bonjour les avantages des equity swap concernant les déclarations de seuil sont ils nouveaux ? ou seulement remis à la mode par l'utilisation récente qu'en fait LVMH ?

Equity swaps have several significant advantages. For one, being an over-the-counter derivatives transaction, they have the attractive feature of being customizable for a particular user's situation. Investors may have specific time horizons, portfolio compositions, or other terms and conditions that are not matched by exchange-listed derivatives.
Equity swaps are private transactions that are not directly reportable to any regulatory authority. Thus, in contrast to exchange-listed derivatives, they are not created in a public forum that can send signals to investors of the intention and position of a particular investor. As noted in previous sections, however, when insiders use equity swaps to substitute for the sale of shares, the transactions must be reported as insider sales. Also, if an executive has sold shares synthetically through an equity swap, this information must be reported to the shareholders in some form. These rules regarding insider transactions always apply and equity swaps are not exempted. In general, specific equity swaps need not be reported, but new accounting and disclosure requirements mean that equity swaps would be indirectly reported when derivatives positions are marked to market and recorded on financial statements and disclosures about risk management are made. In general, however, there are no requirements that specific equity swaps have to be publicly reported.
Like other over-the-counter derivatives, equity swaps are essentially unregulated. Thus, there are no governmental restrictions on whether an entity can engage in an equity swap. Of course, there may be firm-specific prohibitions.
As with nearly all derivatives, equity swaps provide an excellent means of capturing the performance of the underlying asset at low transaction costs. In fact, low transaction costs are one of the primary advantages of derivatives in general. These low transaction costs are reflective of the relative ease of establishing and maintaining a position in the transaction, as well as the low cost to the dealer to hedge the position. In addition, equity swaps incur no custodial costs that would ordinarily be associated with the holding of stock and no withholding taxes on positions related to foreign stock indices. There are, however, some additional transaction costs in the form of legal and documentation costs, but these are relatively small.
Equity swaps can be customized to any specific stock, portfolio, or index and are an excellent means of investing in markets that would otherwise not be very accessible. Foreign markets, in particular, can be more easily accessed by a derivatives dealer, which can then offer its advantage to investors through equity swaps.10 In this regard, Merton [1990] notes that equity swaps can enable one to invest freely in foreign markets without worrying about restrictions that might prohibit foreigners from owning more than a certain percentage of a given stock.11
Merton [1990] also notes that equity swaps have the advantage of not being particularly susceptible to manipulation. While this would tend to be true for any index-based derivative, equity swaps have an additional advantage that would apply even if the equity swap were based on an individual stock. As Merton notes, because equity swap payments are based on the rate of return, any attempt to manipulate the stock price at the end of a period would have the opposite effect that would carry over into the next period.
Equity swaps are not without disadvantages as well. In particular, the cash flows from equity swaps can be significant. Hence, there can be large cash outflows that must be funded. When such outflows are not offset by gains on stock positions, the gains on the stock may have to be liquidated to fund cash outflows. This can offset one of the primary attractions of equity swaps, which is to avoid engaging in transactions in the actual securities.
Being derivative contracts, equity swaps must also have a termination date. Therefore, while they can be used to replicate a position in equity, they are not open-ended. They must be
10See the aforementioned papers by Merton [1990] and Bodie and Merton [2002].
11For example, suppose the laws of a country prohibit a foreign investor from owning more than a given percentage of the shares of any firm domiciled in that country. Using an equity swap, however, the investor can get around that restriction. This can be done if the dealer firm has a foreign subsidiary that owns the foreign stock that would then be used to hedge the dealer's position as it pays out returns on the stock to the investor.
re-established from time to time. This imposes an additional cost and, for certain equity swaps, can lead to less favorable terms than were already in place.
As noted above, equity swaps can be tailored to a specific portfolio, but the more customized the swap, the more costly in terms of the bid-ask spread that a dealer would impose. A user of an equity swap might find it too costly to engage in a transaction customized to a specific, non-standard portfolio. Thus, the swap might be better structured to a commonly used stock index. In that case, however, tracking error will occur. For example, we saw in the previous section cases of portfolios that are synthetically sold using equity swaps tied to an index. If the portfolio does not match the index, the returns on the equity swap will not be matched by the returns on the portfolio being held.
Equity swaps are also subject to credit risk that would not otherwise exist when investing in equity directly. Specifically, the user of an equity swap assumes the risk that the dealer will default.
We now turn to a determination of how the financial terms of an equity swap are determined and how the market value is assessed. Bonjour Philippe
L'intérêt pour ce type d'opération a en tout cas grandi après l'opération de LVMH.
Mais je ne suis pas sûr que ce type d'opération revienne à la mode, en tout cas pas avant que l'AMF n'est exprimé une opinion claire sur l'opération de LVMH.
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