Calculation Agent

A calculation agent is an individual or entity that is responsible for determining the value of a derivative. A calculation agent calculates the value of a derivative and/or the amount owing from each party. The calculation agent can also establish the price for a structured product and may act as its guarantor and issuer. If the counterparty in a derivative transaction is a broker-dealer, then they will often act as the calculation agent.

The calculation agent, who is typically either the seller or a third party, sometimes takes on a number of other roles in more complex transactions. The most important role is deciding who owes what to whom in a transaction like a swap. This includes determining the final price according to the agreed valuation method, the currency rate, the accreted amounts and the current market value. When specifically speaking of swaps, the calculation agent also handles any changes to the reference entity or modifications to the terms of the derivative.

An average investor will likely never interact directly with a calculation agent, as most derivatives accessible to retail investors are standardized and deal with liquid and largely transparent markets. In these cases, establishing the price mainly means looking at the publicly available market price. As the derivatives in question push into thinner markets or the nature of the transaction is customized away from market standards, the calculation agent grows in importance. This increased importance given to the determination of the calculation agent in these bespoke derivatives can result in a conflict of interest when the calculation agent is also the seller.

The calculation agent is not a fiduciary, but is expected to avoid conflicts of interest and act in good faith. Any disagreement over the calculation agent's decisions must be resolved by a disinterested third-party dealer, usually suggested by the calculation agent following consultation over the dispute. The International Swaps and Derivatives Association (ISDA) has outlined a calculation dispute resolution procedure to guide counterparties through what can be a complex process.

With more exotic derivatives that have been customized for the client, the actual valuation may depend on a dealer’s internal models. This makes third-party dispute resolution more difficult, as some of the pricing information and techniques may be unique to that particular dealer. In these cases, third-party dealers can be polled to help establish an average based on the contractual design of the derivative. To make a determination of this nature, there needs to be a response by the set deadline from an agreed-upon minimum number of responders.