Hedge Funds, Master Netting Arrangements and Rehypothecation: Limiting Systemic Risk Through Increased Transparency

34 Pages Posted: 29 May 2009 Last revised: 4 Jun 2009

Date Written: April 20, 2009

Abstract

The failure of Lehman Brothers exposed many fault lines and systemic risks in the financial system. Two of these affect the Hedge Fund community in particular, segregation of client assets and settlement of credit derivatives. Collateral management is designed to limit risk exposure, however the financial tool of rehypothecation allows for that protective measure to be converted into a fee generating tool, that essentially when things go wrong leave parties greater exposed than the may have intended, or had knowledge of. In many instances Prime Brokers rehypothecated collateral without the knowledge of its clients. This paper examines the extent to which current client contracts provide adequate assurance to Hedge Funds in respect of their collateral arrangements with Prime Brokers.

Keywords: Rehypothecation, Prime Brokerage, Hedge Funds, Insolvency, Collateral Management, Asset Segregation, Financial Services Regulation, Financial Services Law

Suggested Citation

Huertas, Michael, Hedge Funds, Master Netting Arrangements and Rehypothecation: Limiting Systemic Risk Through Increased Transparency (April 20, 2009). Available at SSRN: https://ssrn.com/abstract=1411609 or http://dx.doi.org/10.2139/ssrn.1411609

Michael Huertas (Contact Author)

Dentons (Washington, D.C.) ( email )

United States

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