There are a number of committed facilities that borrowers use to obtain loans, two of which are long-term loans and revolving credit facilities. Premium brokers are also trying to create tailored concentration and liquidity requirements for issuers and sectors, the breach of which will result in an end to the margin freeze. These vary from fund to fund depending on the business strategy of each fund. The Fund should ensure that, in the event of non-compliance with these requirements, the blockage only stops with respect to the non-compliant positions that are the origin of the infringement and not as a whole. Any increase in margin requirement percentages applicable to these non-compliant positions should be limited to 50% of the current market value of these positions. When a premium broker attempts to impose concentration and liquidity requirements that relate to the positions of more than one fund managed by a single hedge fund consultant, the advisor should be wary of potential issues related to its fiduciary responsibility to the investors of each fund that may have it. A margin freeze is negotiated separately from a first-class brokerage contract, but ideally both agreements are negotiated at the same time. Our experience has been that it is much more difficult to negotiate a margin freeze after establishing the first-rate brokerage relationship, and that the greatest leverage of a fund exists before the prime brokerage agreement is signed. Margin locks should be a key tool to help hedge funds achieve the efficiency of the labour capital they need to maximize the returns of their investors.
Keep in mind that if you don`t ask for margin blocking, you won`t receive one. In 2009, the problems affecting the big banks also affected their first-class brokerage units and, as a result, the appetite for lending to hedge funds is less important. However, with the recovery of the banking sector, credit conditions are beginning to ease. As a result, we are starting to see the return of Margin Lock-up for the largest premium brokerage clients, who might actually be in a stronger trading position for such deals than a year ago. To learn more about margin lock-ups and other topics related to premium brokerage or Custody, Please contact Karl Cole-Frieman of Cole-Frieman – Mallon LLP (www.colefrieman.com) at 415-352-2300 or [email protected] In the most basic terms, a «margin lock-up» or «term commitment» is a credit facility that is extended by a broker to a hedge fund or other institutional client. The terms are used interchangeably in the sector. Margin Lock-ups prevent the premium broker from changing margin rates, warranty requirements and often refuse to evacuate hedge fund trades during the life of lock-ups. For large managers, it`s often 90 days, but they can range from 30 days to 120 days, and maybe even longer for the biggest hedge fund managers. From a practical point of view, the way the arrangement works is that if a premium broker wants to make a change covered by margin blocking, they provide the manager with the necessary notification before he does. More demanding hedge fund managers are increasingly eager to achieve efficiencies in the labour capital market by guaranteeing reasonable market prices for margin and securities lending and by identifying opportunities to optimize their assets.
In this context, many agency collateral trading managers, such as S3 partners, have hired an interface between their hedge fund clients and senior brokers who use the anonymity of their clients when collecting information and who use the fact that some first-class assets are worth more than others in financing markets at different times. Unlike a promised facility, an unhired facility is a credit facility in which the lender is not required to borrow funds in the event of a borrower`s request.