Breakable Equity Swaps, Stock Borrow Sourcing, and Unwind Risk

Summary

The document discusses a possible reason some customer equity swaps are breakable: the dealer may source shares through an arrangement that supports securities lending. In the example, a long synthetic position in sought-after shares can contribute to inventory that a bank lends to another swap client seeking a short position. The answer links the breakability of the sourcing trade to the stability of those locates and the possibility that borrowed shares may be recalled. It also describes a dealer-side concern: an unexpected intraday unwind may leave the swap desk without shares to sell, and mentions a synthetic fill engine as a way to estimate theoretical unwind prices.

This is an informal explanation rather than a source-backed market survey. It does not substantiate the broader claim about dealer-to-dealer and customer-to-dealer breakability, nor establish how common the described arrangement is. The answer mentions a break fee but offers no supporting data or general pricing analysis, so the mechanism should be treated as an example rather than a market rule.

Key ideas

• A sourcing swap may connect a client’s synthetic long exposure with shares available for securities lending.
• Breakability can reflect uncertainty about the stability and recall risk of stock locates.
• An unexpected unwind can create inventory and execution challenges for the dealer.
• A synthetic fill engine can estimate theoretical prices for unwinding a sourcing position.
• The explanation is anecdotal and does not establish how prevalent these practices are.

Tags

# Structure of market for equity swaps (breakable vs non-breakable)


# Structure of market for equity swaps (breakable vs non-breakable)












In the following answer to a question on breakable total return swaps , the answerer writes that:

> As a general rule you will find that dealer-to-dealer trades are locked and customer-to-dealer trades are fully breakable.

Does anybody know any source for this claim?

Data on equity swaps by trade features would also be welcomed if it supports the claim.

## Answer by user2650102 (score 2)

https://quant.stackexchange.com/a/79510

there is a break-fee (5bps-10bps) generally associated with it. i believe it's more related to a "Sourcing" type equity swaps. Where you are long on synthetic position a basket of stocks which the banks can rehypothecate to the BRM desk

for example, u are long some CHINA-A shares that are deemed "HOT" which the securities lending guys then lend out as locates for the other swap client to short-sell (note to the stock exchange it's a LONG-SELL) and since it's marked as long-sell the tick-rule doesn't apply meaning the electronic trading algo can cross the spread more often if needed)

so breakable would mean that the locates shown out isn't "stable" and have high recall risk. High recall risk would translate into a lower borrow rate for the borrower which mean the banks make less on the fees.

but there is a risk for breakable coming from inventory aspect when u need to unwind your sourcing trade during intra-day without prior notice. Swap desk doesn't have the shares to sell out.

There is the concept of synthetic fill-engine which is a software-computed way of working out the theoretical fill-prices for your sourcing trade unwind.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.