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
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
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