OTC Give Up Agreement: What It Is and How It Works
OTC give up agreement is a common financial contract used in over-the-counter (OTC) trading. It is an agreement between two parties, where one party (the give-up party) agrees to give up its right and obligation to trade with a counterparty (the executing party). Instead, the give-up party transfers its position to a third party (the give-up broker), who executes the trade with the executing party on behalf of the give-up party.
This type of agreement is often used in situations where the give-up party does not have direct access to the executing party or wants to delegate the trading to a specialist or an intermediary. For example, a hedge fund may use a give-up agreement to allow its prime broker to execute trades on its behalf with other brokers.
The give-up broker acts as a middleman between the give-up party and the executing party. It receives instructions from the give-up party, executes the trade, and confirms the trade details to both parties. The give-up party remains responsible for the trade, but the give-up broker takes on the role of the executing party in the transaction.
The give-up agreement typically includes terms such as the type and size of trade, the price, the settlement date, and any other relevant details. It also specifies the commission or fee to be paid to the give-up broker for its services. The agreement is binding and enforceable, and any disputes are typically resolved through arbitration.
One advantage of using a give-up agreement is that it allows the give-up party to leverage the expertise and resources of the give-up broker. The give-up broker can provide access to a broader range of executing parties, manage risk, and ensure timely execution and settlement of trades.
However, there are also potential drawbacks to using give-up agreements, such as higher costs and a lack of control over the executing party. The give-up party may also face additional counterparty risk if the give-up broker defaults or fails to execute trades properly.
In conclusion, an OTC give up agreement is a key tool for delegating trading responsibilities in the OTC market. It allows the give-up party to leverage the skills and resources of the give-up broker while retaining control over trading decisions. However, it is important to carefully consider the potential benefits and risks before engaging in such an agreement.