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In the case of a bond or a share, there is a bondholder or a shareholder on one side and a company issuing the security on the other side. In a derivative contract, which party can be named as the issuer? Or do we have to speak only of short and long side? How this may possibly differ on the basis of the trading venue and on the qualities of the contract parties (e.g. a professional investor, an institution, a non-professional etc.)?

In as match as, in the context of "Personal investing and asset allocation", an investor wants to make a speculative investment in a derivative contracts s/he has to know these "roles".

Besides the law might put specific duties or responsibilities on the contract party regarded as the issuer.

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Could you be more specific? What problem are you trying to solve? Might this relate to personal finance? –  Chris W. Rea Jan 29 '13 at 21:12
    
I saw 22 questions tagged derivatives, so I thought they were legitimate and, after all, there is not much quantitative content so I think it is not the case to post it on quant.stackexchange.com, where anyway there is large room to talk of derivatives. As for my question, think of a bond or a share; there is a bondholder or a shareholder on one side and a company issuing the security on the other side. In a derivative contract, which party can be named as the issuer? –  antonio Jan 29 '13 at 21:26
    
@antonio Despite the "derivatives" tag existing, not all derivatives questions are on-topic; questions should also relate to personal finance, the topic for this site. –  Chris W. Rea Jan 29 '13 at 21:56
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As to the question: What kind of derivative and who might the counterparties be? For instance, if you're referring to exchange-listed options that individuals might be able to buy (therefore, on-topic from the personal finance perspective), then the Options Clearing Corporation (OCC) acts as issuer for all exchange-traded options in the U.S. The option seller and buyer are therefore not considered issuers, even though one is the short side and one is the long side. –  Chris W. Rea Jan 29 '13 at 21:57
    
@Chris, I guess that's the answer the OP was looking for. –  littleadv Jan 30 '13 at 0:58

1 Answer 1

While the issuer of the security such as a stock or bond not the short is responsible for the credit risk, the issuer and the short of a derivative is one.

In all cases, it is more than likely that a trader is owed securities by an agent such as a broker or exchange or clearinghouse.

Legally, only the Options Clearing Corporation clears openly traded options. With stocks and bonds, brokerages can clear with each other if approved.

While a trader is expected to fund margin, the legal responsibility is shared by all in the agent chain. Clearinghouses are liable to exchanges. Exchanges are liable to members. Traders are liable to brokerages. Both ways and so on.

Clearinghouses are usually ultimately liable for counterparty risk to the long counterparty, and the short counterparty is ultimately liable to the clearinghouse.

Clearinghouses are not responsible for the credit risk of stocks and bonds because the issuers are not short those securities on the exchange, thus no margin is required. Credit risk for stocks and bonds is mitigated away from the clearing process.

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