Articles By Topic
By Topic: Repurchase Agreements
From Vol. 10 No.11 (Mar. 16, 2017)
Types, Terms and Negotiation Points of Short- and Long-Term Financing Available to Hedge Fund Managers
As hedge funds move into relatively illiquid assets in an effort to improve returns, traditional short-term margin and repurchase agreement financing may no longer be appropriate or available. Instead, hedge fund managers are pursuing short- and long-term financing through prime brokers, private-equity-style capital call facilities, term facilities and special purpose vehicles. See “Can a Capital on Call Funding Structure Fit the Hedge Fund Business Model?” (Nov. 5, 2009). A recent presentation by Dechert partner Matthew K. Kerfoot provided an overview of these types of financing arrangements and some of their key negotiating points. This article summarizes his insights. For additional commentary from Kerfoot, see “The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options” (Oct. 27, 2016); and “Dechert Panel Discusses Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors” (Jun. 14, 2016).Read Full Article …
From Vol. 8 No.30 (Jul. 30, 2015)
In 2008, Lehman Brothers, Inc. (Lehman) entered into a liquidation proceeding in the U.S. Bankruptcy Court for the Southern District of New York, in accordance with the Securities Investor Protection Act (SIPA). A number of banks that had sold securities to Lehman under various repurchase agreements (repos) filed claims in the proceeding seeking to be treated as “customers” of Lehman, which would have given them priority claims in respect of the securities covered by the repos. Lehman’s bankruptcy trustee determined that the banks were not “customers” within the meaning of SIPA. Both the Bankruptcy Court and the U.S. District Court for the Southern District of New York affirmed the trustee’s determination. See “U.S. District Court Rules on Whether a Party to a Repurchase Agreement with a Broker-Dealer That Enters Liquidation Is a ‘Customer’ of the Broker-Dealer under SIPA,” The Hedge Fund Law Report, Vol. 7, No. 18 (May 8, 2014). In what is likely to be the last judicial word on the subject, the U.S. Court of Appeals for the Second Circuit recently ruled on the District Court’s decision. This article summarizes the facts and circumstances surrounding the Lehman repos; examines the Second Circuit’s legal reasoning; and discusses possible implications of the decision on the hedge fund industry as a whole. For coverage of a dispute over “customer” status in a liquidation of a futures commission merchant, see “Bankruptcy Court Rules on Whether Funds Held by Bankrupt Futures Commission Merchant for Retail Forex and OTC Metals Trading Are ‘Customer Property’ Entitled to Priority Distribution,” The Hedge Fund Law Report, Vol. 7, No. 20 (May 23, 2014).Read Full Article …
From Vol. 7 No.18 (May 8, 2014)
U.S. District Court Rules on Whether a Party to a Repurchase Agreement with a Broker-Dealer That Enters Liquidation Is a “Customer” of the Broker-Dealer under SIPA
Following its collapse in 2008, broker-dealer Lehman Brothers Inc. (Lehman) entered a liquidation proceeding administered by the U.S. Bankruptcy Court for the Southern District of New York (Bankruptcy Court) in accordance with the Securities Investor Protection Act of 1970 (SIPA). Under SIPA, “customers” of a failed broker-dealer are entitled to special protection in the broker-dealer’s liquidation. In that regard, several banks that had entered into repurchase agreements with Lehman prior to its collapse sought to have their claims categorized by Lehman’s liquidation trustee as “customer” claims under SIPA. The trustee refused to do so; and the Bankruptcy Court concurred. The banks then appealed the Bankruptcy Court’s decision to the U.S. District Court for the Southern District of New York. This article offers a detailed discussion of the District Court’s decision. Although broker-dealer liquidations are rare, the Court’s decision should inform the drafting of hedge funds’ prime brokerage and repurchase agreements. See “Prime Brokerage Arrangements from the Hedge Fund Manager Perspective: Financing Structures; Trends in Services; Counterparty Risk; and Negotiating Agreements,” The Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013).Read Full Article …
From Vol. 5 No.1 (Jan. 5, 2012)
Recent SEC Settlement Cautions Hedge Fund Managers Not to Turn a Blind Eye to Potential Impropriety in Evaluating Transactions with Counterparties
A recent SEC settlement demonstrates that financial institutions, including hedge fund managers, can be held liable for turning a blind eye to potential counterparty impropriety in choosing to enter into transactions with such counterparties. This article describes the settlement and discusses its implications for hedge fund managers.Read Full Article …
From Vol. 2 No.18 (May 7, 2009)
Treasury Takes Action to Penalize Repo Fails; Hedge Funds Could See Higher Charges, Less Availability of Treasuries as a Result
In an effort to reduce the likelihood of fails in the repurchase agreement (repo) market, the Treasury Market Practices Group (TMPG), an industry body sponsored by the Federal Reserve Bank of New York, has imposed a three percentage point fee on investors in the repo market who fail to deliver borrowed Treasuries on time. The TMPG action is designed to increase market efficiency. According to a statement issued by the TMPG, “[s]ince November, short-term interest rates have declined to unprecedented levels, increasing the urgency to implement new practices to enhance liquidity and improve functioning of the U.S. Treasury market. Accordingly, the TMPG focused on the fails charge recommendation as the most immediate and meaningful way to improve Treasury market functioning and liquidity.” However, while the charge is meant to increase market liquidity, it could ultimately have the reverse effect: the fee is likely to make Treasuries scarce as the owners of these securities become reluctant to lend and instead opt to hold onto them. We define a repo transaction and discuss the TMPG action, hedge funds’ participation in the repo market, the reasons for and frequency of repo fails, whether the fee is high enough to deter fails and the impact of the TMPG action on the current market.Read Full Article …
From Vol. 1 No.4 (Mar. 24, 2008)
- Repo market, reeling from subprime mortgage crisis, is no longer a cheap viable method of accessing short term capital.
- Bear Stearns sells off, Carlyle Capital liquidates and KKR Financial Holdings restructures debt for a second time in four months.
- New Fed “primary dealer” repo program loans nearly $30 billion - although unavailable to hedge funds, the resulting increased liquidity may stabilize industry and support hedge funds.