INSTITUTIONALLY MANAGING YOUR TRADING RELATIONSHIPS

Previously published in Wells Fargo Prime Service’s Industry and Regulatory Updates, October 2018 edition

Is it really that important to spend time and money negotiating the terms of my trading and financing agreements? Why? It’s really all about relationships, isn’t it? Are some terms more important than others?

On a day-to-day basis, clients aren’t looking through their trading agreements. If they have a question, they call their contact at the dealer who susses out the answers by calling his or her legal or ops team. This may not be an option in times of uncertainty but such times are when a firm’s knowledge of the terms of its relationship is critical. The uncertainty can be market-related or could be due to something that happens within a firm.

For example, when Lehman filed for bankruptcy, firms needed to quickly understand the terms of their agreements, from the most basic information to a more nuanced understanding of their collateral rights. Their contacts at Lehman weren’t there to answer their questions – in fact, no one was answering their phones at all. First, there was a scramble to find agreements and then, to locate attorneys that could review hundreds of pages to answer questions such as: What entities am I facing under these contracts? Where are my assets held? Can I get my collateral back? What is my exposure to these entities? Can the bankrupt entity grab the collateral held under the other agreements with other Lehman entities?

Other less-world-changing events can also impact your relationships. For example, If LIBOR – OIS spreads widen out, can a dealer change your financing rates or terminate your relationship? At a firm level, inflection points, such as the departure of a key person or an SEC investigation, can trigger termination rights and notification obligations.

If you have one or two PB relationships, a few ISDAs and a couple of futures accounts, you can have your attorney provide you with a detailed summary of your more important provisions. It’s a little expensive, but your information will be there when you need it. You just have to remember to update and maintain these summaries as your relationships with dealers evolve.

If you have multiple entities with many trading relationships, the spreadsheet option is no longer a viable solution. A fund manager with four trading entities, each of which have three or four PB agreements, ten or more ISDAs, three or four futures agreements, and several repurchase agreements, options agreements, total return swaps and execution agreements will have hundreds or thousands of documents across possibly dozens of dealer relationships to track. Additionally, based on the strategies and jurisdictions of each trading entity, the agreements with a dealer can differ from entity to entity. Manual summaries are unreliable and the upkeep of this information without structure becomes unmanageable.

I receive a phone call several times a year where a client describes some event and ask us to look into its impact on their agreements. Our team drops what we are doing and pull all of the agreements that we and the client can locate. We then pore over each agreement to determine the applicable provisions and impact of the event to provide the client with an update. This process sometimes takes days or weeks and I worry about missing something. This type of review is expensive and time consuming.

The events of 2007 and 2008 also evidence the importance of promptly accessing and negotiating the terms of these agreements. Market events and firm events occurring at once require a good grasp of agreement triggers, which is critical to maintaining and strategically managing a firm’s stability. In my prior life at a hedge fund, during such times, knowing and consciously negotiating the terms of our agreements enabled us to push back on actions that could have hurt the business. Our terms gave us bargaining power that we otherwise would not have had.

Seeing this need for information quickly and how opaque these agreements can be (similar in substance, but often varying in form from dealer to dealer), our firm has developed a web based application to store, track and organize the material terms of trading and financing agreements. Our tool, Koya DocuTracker, was developed with a focus on industry terms and is not specific to any one dealer. The functionality stores and organizes over 25 trading and financing agreements. It also tracks and provides reporting on hundreds of material economic, credit and legal terms in these agreements and across dealers. The answers are summarized into plain English answers and available at the click of a button.

To be institutional and truly manage the stability of a trading firm’s business, it is crucial in the most extreme times to know and quickly access the terms of the agreements that form the foundation of your business. Whichever way you choose to do this, it should be reliable, readily available, and comprehensive.

BusinessConsulting@wellsfargo.com
www.wellsfargo.com/primeservices
This document and any other materials accompanying this document (collectively, the “Materials”) are provided for general informational purposes.
By accepting any Materials, the recipient thereof acknowledges and agrees to the matters set forth below in this notice.
The Materials are not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described herein.
The Materials are not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. No person providing any Materials is acting as fiduciary or advisor with respect to the Materials. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the Materials.
Wells Fargo Securities LLC makes no representation or warranty (expresses or implied) regarding the adequacy, accuracy or completeness of any information in the Materials. Information in the Materials is preliminary and is not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in the Materials represent the judgment of Wells Fargo Securities at this time, and are subject to change without notice. Interested parties are advised to contact Wells Fargo Securities for more information.
Notwithstanding anything to the contrary contained in the Materials, all persons may disclose to any and all persons, without limitations of any kind, the U.S. or Canadian federal, state, provincial or local tax treatment or tax structure of any transaction, any fact that may be relevant to understanding the U.S. or Canadian federal, state, provincial or local tax treatment or tax structure of any transaction, and all materials of any kind (including opinions or other tax analyses) relating to such U.S. or Canadian federal, state, provincial or local tax treatment or tax structure, other than the name of the parties or any other person named herein, or information that would permit identification of the parties or such other persons, and any pricing terms or nonpublic business or financial information that is unrelated to the U.S. or Canadian federal, state, provincial or local tax treatment or tax structure of the transaction to the taxpayer and is not relevant to understanding the U.S. or Canadian federal, state, provincial or local tax treatment or tax structure of the transaction to the taxpayer.
Any securities or instruments described in these Materials are not deposits or savings accounts of Wells Fargo Bank, National Association and are not insured by Federal Deposit Insurance Corporation, Canada Deposit Insurance Corporation or any other governmental agency or instrumentality.
US IRS Circular 230 Disclosure:
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in the Materials is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
©2018 Wells Fargo. All Rights Reserved.
Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA,

Download file

Copyright © 2013 Koya Law LLC®. All Rights Reserved.