AET in prime brokerage

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Do you need automatic early termination provisions — where appropriate — in a prime brokerage relationship? Can keep this pretty simple.

• Yes, under the ISDA Master Agreement, because it’s built in (but, for the reasons set out below, it doesn’t really make much sense even there).
• No otherwise, because the one party who would usually need it to close out on the spot is the prime broker, and its client, being a hedge fund, will almost certainly not be in an AET jurisdiction (they are places like Germany and Switzerland), nor the kind of hoopy dude — a financial services institution of some sort, in other words — to whom AET would normally apply. The prime broker well may be just such an insitution in just such a jurisdiction, of course — but unless the client gets charged for regulatory capital (as a rule, hedge funds don’t) it is better to keep the flexibility inherent in not being automatically closed out of your own positions when you least expect it, and running what is basically an impossibly small risk that (a) your counterparty will blow up; (b) you will be in the money and (c) its administrator will somehow find a way to cherry-pick profitable trades in your PB arrangement and ignore loss-making ones, notwithstanding the clear netting language, and ther fact that the bank itself relies on exactly that intellectual construct — that is, your insolvency administrator not being able to cherry-pick its profitable trades — in risking your portfolio for capital charges in the first place.

And the funds can pull all their positions on any day anyway.

See also

• Automatic early termination