Articles By Topic
By Topic: Counterparty Risk
From Vol. 5 No.38 (Oct. 4, 2012)
Finadium LLC (Finadium), in conjunction with BNY Mellon, has released a white paper highlighting the potential for growth in the use of prime custody services by hedge funds (White Paper). Since the 2008 financial crisis, hedge funds have used less leverage, which has led to increased demand for custodial services for holding unencumbered assets. On recent trends in the use of leverage by hedge funds, see “Federal Reserve Credit Officer Survey Identifies Trends in Prime Broker Credit Terms, Hedge Fund Leverage and Counterparty Risk,” The Hedge Fund Law Report, Vol. 5, No. 17 (Apr. 26, 2012). Finadium estimates that $684 billion in fund assets may be available for prime custody services. Prime custody arrangements offer funds potential cost savings and protection from the risk of the bankruptcy of a prime broker or other counterparty. This article summarizes the key findings from the White Paper. See also “Hedge Funds Turning to Prime Brokerage Trust Affiliates For Added Protection Against Prime Broker Insolvencies,” The Hedge Fund Law Report, Vol. 2, No. 25 (Jun. 24, 2009).Read Full Article …
From Vol. 5 No.17 (Apr. 26, 2012)
Federal Reserve Credit Officer Survey Identifies Trends in Prime Broker Credit Terms, Hedge Fund Leverage and Counterparty Risk
One of the fundamental premises of the Dodd-Frank Act is that leverage in the financial system – if inadequately monitored, insufficiently understood and too voluminous – can create systemic risk. Accordingly, many of the provisions in the Dodd-Frank Act are intended to reduce leverage or increase monitoring of leverage. In the same vein, regulators have been collecting information about leverage via interaction with market participants. In the U.K., for example, the FSA conducts a periodic study of potential systemic risk engendered by hedge funds. See “U.K.’s FSA Issues Latest Biannual Report Assessing Possible Sources of Systemic Risk from Hedge Funds,” The Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012). In the U.S., since 2010, the Federal Reserve has been conducting a quarterly Senior Credit Officer Opinion Survey on Dealer Financing Terms. The survey generally asks dealers about the availability and terms of credit, securities financing and over-the counter (OTC) derivatives markets. On March 29, 2012, the Federal Reserve published the results of its most recent survey (Survey). The Survey polled the senior credit officers of the twenty largest dealers in dollar-denominated securities financing and the most active intermediaries in OTC derivatives markets. The purposes of the Survey were to: (1) obtain a consolidated perspective on changes in the management of credit risk between December 2011 and February 2012; and (2) identify trends in financing terms between dealers (including prime brokers and other counterparties with whom hedge fund managers effect trades) and their customers (including hedge funds). This article summarizes the Survey’s findings with respect to trends in: credit terms offered by dealer-respondents, including prime brokers; demands by hedge funds for better credit terms from prime brokers; overall use of leverage by hedge funds; credit terms with respect to OTC derivatives; and demand for and credit terms relating to securities financing.Read Full Article …
From Vol. 4 No.3 (Jan. 21, 2011)
2010 Greenwich Associates Global Custodian Prime Brokerage Study Discusses Counterparty Risk Concerns, Sources of Assets, Balance Spreading, Leverage Levels, Separately Managed Accounts and Hedge Fund Staffing Benchmarks
In the 2010 Greenwich Associates Global Custodian Prime Brokerage Study, institutional financial services consulting and research firm Greenwich Associates offered insight on the relationship between hedge funds and prime brokers, high water marks, counterparty risk concerns among hedge fund managers, hedge fund money raising, spreading of hedge fund cash and non-cash balances, use by hedge funds of leverage and separately managed accounts and hedge fund manager staffing. The insights in the study were based on interviews with over 1,800 hedge fund managers across North America, Europe and Asia-Pacific. This article summarizes the key findings of the study.Read Full Article …
From Vol. 2 No.4 (Jan. 28, 2009)
Report by Pershing LLC and Aite Group LLC Finds Counterparty Risk Remains a Paramount Concern Among Hedge Fund Managers
According to a white paper published by Pershing LLC, a subsidiary of Bank of New York Mellon Corporation, and Aite Group LLC, an independent research and advisory firm focused on business, technology and regulatory issues and their impact on the financial services industry, managing counterparty risk is a far more critical component of a hedge fund’s overall business operations today than it has been in previous years. We discuss the findings of the white paper, and detail the paper’s recommendations regarding best practices for proactively managing counterparty risk.Read Full Article …
From Vol. 1 No.20 (Sep. 4, 2008)
Counterparty risk from credit default swaps (CDS) represents a serious threat to global financial markets, at least in the opinion of 75% of respondents participating in a recent survey conducted by Greenwich Associates, the financial market research and analysis firm. The survey also showed that US respondents were more concerned about the use of CDS, with 85% saying they are a serious threat to global markets. European institutions were slightly more sanguine, with roughly 55% seeing CDS counterparty risk as a significant threat. Moreover, the study also found that following the near collapse of Bear Stearns and its subsequent buyout by JPMorgan Chase & Co., almost 60% of respondents thought another large financial services firm would collapse within the next six months, while 15% believed such a failure would occur within the next 12 months. Only 27% of institutions surveyed think there will not be another Bear Stearns-type collapse. The Hedge Fund Law Report talked to the authors of the survey about their findings, and interviewed leading lawyers about the implications of the survey’s findings for hedge funds.Read Full Article …
From Vol. 1 No.20 (Sep. 4, 2008)
In what some are calling a remarkable confession, a panel of prestigious Wall Street executives has issued a report acknowledging the role of the investment banking and brokerage industries in the financial shocks of 2007-2008 and calling for extensive changes in how their businesses operate. The report also contains a notable discussion of hedge funds as an “emerging issue.” The report contains 60 proposals, notably including: requiring banks to account for more assets on their balance sheets; enhancing disclosure requirements and sales standards for complex debt instruments; matching trades on the same day; and increasing risk management and liquidity standards. The report notes that “indirect” supervision of hedge funds via direct regulation of supervised entities that act as investors, creditors and counterparties to hedge funds has worked reasonably well during the past year of financial market turmoil. However, the report also acknowledges that some hedge funds (and private equity funds) contributed to the reach and severity of the recent financial crisis, thus reviving the question of whether direct supervision of hedge funds would be appropriate.Read Full Article …
From Vol. 1 No.10 (May 6, 2008)
Australian Court Holds that Lender to Broker-Dealer, not the Broker-Dealer’s Client, Owns Securities Transferred by the Client to the Broker-Dealer Under a Securities Loan Agreement, and Pledged by the Broker-Dealer to the Lender
- Australian court holds that under a securities lending agreement based on form developed by the International Securities Lending Association, title to securities and cash exchanged in a securities “loan” is transferred.
- Accordingly, a broker-dealer who received shares under such a securities lending agreement acquired title to the shares, and became entitled to pledge the shares to its lenders; lenders, in turn, had right to foreclose on shares.
- Emphasizes the importance to hedge funds of fully understanding their complex legal and collateral relationships with prime brokers.