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Prime broker solvency: Difference between revisions
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Under a [[New York law]] [[rehypothecation]] arrangement, this is not ''necessarily'' true, because under one of those typically alchemical US legal constructs, a customer retains ownership of rehypothecated assets even while its prime broker sells them outright into the market. So, at least in theory, inside the [[prime broker]]’s books and records the customer has a preferred claim to the rehypothecated asset over other creditors of the bank. What this means in practice may be quite different (to what a US customer expects, and quite similar to what an English one would get). | Under a [[New York law]] [[rehypothecation]] arrangement, this is not ''necessarily'' true, because under one of those typically alchemical US legal constructs, a customer retains ownership of rehypothecated assets even while its prime broker sells them outright into the market. So, at least in theory, inside the [[prime broker]]’s books and records the customer has a preferred claim to the rehypothecated asset over other creditors of the bank. What this means in practice may be quite different (to what a US customer expects, and quite similar to what an English one would get). | ||
===Releasing [[security interest]]s=== | |||
Even if the administrator manages to recover all the reused assets and returns them to the custody account, the hedge fund is not yet out of the woods: there is a security interest to be resolved. [[Charge]]s, [[pledge]]s and [[mortgage]]s are, of course, [[deep magic]] of the financial markets. There is an element of rite — and no small theatre — in their release. This pantomime of itself is likely to delay return of your asset, because no-one wants to give up on credit claims when their are debts to be repaid, and the banks administrator will want to make sure that every conceivable debt claim for which the assets are security is recovered first — or applied against the assets — before any security is released. | |||
Here the “kitchen-sink” security model that all [[prime broker]]s use will gum things up. For prime brokers take security against not just against loan indebtedness and close-out liabilities due under identified [[master agreement]]s. They like to cast the net widely. Absurdly widely. You know, “any [[indebtedness]], claim, [[liability]], [[Damages|damage]] or [[loss]], present or future, direct or indirect, [[Contingent liability|contingent]] or otherwise, that Client or Client’s [[affiliates]], friends or relations, jointly or severally, may owe to [[prime broker|Prime Broker]], its [[affiliates]] and any of its employees, officers directors, agents or advisors however described”. Right? | |||
Oddly, [[buy-side legal eagle]]s do not tend to argue very hard about this, possibly seeing it as one of those “market conventions” that you can’t get around that only really bites when the fund itself has blown up, and [[IBGYBG]] and all that. True, at the point where the ''fund'' has gone [[tetas arriba]] you are welcome to throw any claims you think your Guatemalan subsidiary may have into the 5 billion dollar hole in the ground that used to be a hedge fund. See what difference it will make. | |||
But — in that extreme tail event that is the ''prime broker'' going [[titten hoch]], it may not change how much you owe, but it will slow down the release of that security, as the administrator will want to make enquiries of the Guatemalan subsidiary to check if anything was outstanding. It could be anything: old commissions, manufactured dividends on collateral coupons — all kinds of odds and sods, and running these down and getting a “no” out of some scared contractor in Bratislava on a zero-hours contract will not be easy. It will take time. | |||
It is said that some banks are ''still'' unwinding their MF Global portfolios, eleven years later. | |||
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