Calculation Agent
What Is a Calculation Agent?
A calculation agent is an individual or entity that is responsible for deciding the value of a derivative. A derivative is a financial security that gets its value from an underlying asset or benchmark. A calculation agent computes the value of a derivative and the amount owing from each party.
The calculation agent can likewise lay out the price for a structured product and may act as its guarantor and issuer. In the event that the counterparty in a derivative transaction is a broker-dealer, they will frequently act as the calculation agent.
Figuring out Calculation Agents
The calculation agent, who is commonly either the seller or a third party, at times takes on a number of different jobs in additional complex transactions. This job incorporates concluding who owes what to whom in the transaction. Nonetheless, there are other important obligations that a calculation agent is accused of, including:
- Deciding the last price as per the agreed valuation technique
- Deciding the currency rate on the off chance that two unique currencies are exchanged because of the cash flow payments between the two gatherings
- Computing the earned or accreted amounts as well as accrued interest
- Setting the current market value
- Laying out the number of business days for the settlement of the cash flows, for example, two business days from the transaction trade date
- Any changes or necessary restructurings or were mentioned by the gatherings in question
- Acting sincerely and with reasonableness in getting the transaction completed as well as appropriate, ideal notice or confirmation of the financial subtleties to the gatherings
Companies, for instance, that are due to receive floating or variable interest payments from a security could need fixed payments all things being equal. They could exchange the variable-rate cash flows — through a swap — to a company that needs floating rate payments however has fixed-rate cash flows. A swap is the exchange of cash flows starting with one company or counterparty then onto the next. The calculation agent would handle the cash flow payments and pricing as well as any vital changes to the reference entity or the debt issuer.
The Importance of a Calculation Agent
An average investor won't probably ever interact straightforwardly with a calculation agent, as most derivatives open to retail investors are normalized and deal on liquid and to a great extent transparent markets. In these cases, laying out the price essentially means taking a gander at the publicly accessible market price. As the derivatives being referred to push into more slender markets or the idea of the transaction is redone away from market standards, the calculation agent fills in significance. In any case, the increased significance given to the determination of the calculation agent can bring about a conflict of interest when the calculation agent is likewise the seller.
The calculation agent is additionally important in transactions that are netted. Companies could owe each other a surge of cash flow payments in a transaction. If one counterparty owes another counterparty more money, the calculation agent would decide the net difference owed by the first counterparty. At the end of the day, rather than both counterparties transferring payments to one another, the counterparty that owed more would pay the net difference with the calculation agent facilitating the calculation, payment, and settlement date.
Disputes With a Calculation Agent
The calculation agent is certainly not a fiduciary however is expected to stay away from conflicts of interest and act with honest intentions. Any conflict over the calculation agent's choices must be settled by a disinterested third-party dealer, ordinarily suggested by the calculation agent following conference over the dispute. The International Swaps and Derivatives Association (ISDA) has illustrated a calculation dispute resolution methodology to direct counterparties through what can be a complex cycle.
With additional exotic derivatives that have been redone for the client, the actual valuation might rely upon a dealer's internal models. This makes third-party dispute resolution more troublesome, as a portion of the pricing data and procedures might be unique to that specific dealer. In these cases, third-party dealers can be surveyed to assist with laying out an average in light of the contractual design of the derivative. To make a determination of this nature, there should be a response by the set cutoff time from an agreed-upon least number of responders.
Features
- The calculation agent works with the payments of the cash flows between the two gatherings and lays out the settlement date for the exchange.
- A calculation agent is entrusted with computing the value of a derivative, similar to a swap, or a structured product and may act as its guarantor and issuer.
- The calculation agent, who can be the seller or a third party, likewise decides the last price, the currency rate on the off chance that two unique currencies are exchanged, and any accrued interest.
