Savvy hedge funds can use swaps, provided by their prime brokers, to bypass restrictions on trading equities. One of the principal drivers of using equity swaps – the main product in synthetic prime brokerage – is to access markets in Asia where access to cash products is restricted or investor identification is required. Outside Asia the main reason for use is avoidance of transaction taxes.
“Over the past couple of years, we have seen the continuation of a trend towards swap products that has been going on for a while, particularly in Europe and to a lesser extent in Asia,” says Paul Fleming, senior vice-president at State Street Global Advisors. “There is a move towards synthetic products, whether it is for tax reasons or for reporting requirements. There are numerous reasons for doing a transaction on swap.”
