The International Swaps and Derivatives Association plans to start working on an agreement allowing hedge funds to trade with multiple derivatives counterparties more easily. "This would be immensely useful for hedge funds," said Simon Gleeson, partner at Allen & Overy in London.
The document, called a give-up agreement, would allow hedge funds to enter a full prime brokerage relationship with one firm and then execute trades with others. It works by the hedge fund executing a derivatives trade with a counterparty and then within 30 minutes that counterparty enters a trade with the fund's prime broker in which the prime broker steps into the shoes of the fund. The prime broker then passes that risk to the hedge fund. This structure leaves the first counterparty with the economics of the trade, but moves the credit risk to the prime broker, which then uses collateral from the hedge fund to cover its exposure.
The hedge fund would only post collateral with its prime broker. Andy Preston, chief investment officer at KBC Alternative Investment Management in London, which has USD5 billion under management, said, "A centralization of collateral requirements would help us in terms of making collateral management less labor intensive and probably reduce the risk."
Kimberly Summe, general counsel at ISDA in New York, said, "The first month or two of next year will be learning about this, working out what the obstacles are and then we can [start drafting something]."
Full scale prime brokers documents are potentially very complicated, because you have a wide range of services, but Simon Firth, partner at Linklaters in London, said the give up arrangement documentation is likely to be much simpler. In addition, these types of documents are already used in the exchange traded products market and Patrick Clancy, a lawyer at Shearman & Sterling in London, thinks it would not be too hard to draft a similar document for over-the-counter instruments. One lawyer, however, said the main areas of contention are likely to be around the confirmation of give-up trades and the limits of these trades. This structure puts a lot of strain on the operations department of the bank so some firms will look to put a cap on the number of trades it will execute under the document.
