SwarmPoint

Bernard Madoff’s last minute honesty will not be the last disclosure to be prompted by the harsh realities of the current financial climate. Clients need reassuring and that means providing greater transparency so that they know bad news is flowing with the good. Madoff’s funds were being executed and cleared by his own business so there was no independent custodial or prime broker reporting of the value of the funds. Regulators and the market will put pressure on this kind of arrangement but funds providing their own execution and clearing or with multiple brokers are left with a lot of integration work which it is difficult for them to manage internally and they are often reluctant to resort to hearsay reporting of positions to a prime broker.

Leveraged funds will to some extent be driven to disclose fuller details to their lending brokers because without a true prime broker arrangement there is not visibility of the full fund and trust is no longer sufficient to allow lending to the level of leverage that the funds had enjoyed. A lesson that was taught by the Long Term Capital experience where multiple lenders were unaware of the extend of borrowing and exposure from other brokers.

The greater significance of transparency gives added leverage to Prime Brokers and Custodians to offer reporting services and increase the premiums people are willing to pay for more regular or better integrated reporting. The challenges of integrating derivative workflows in order to provide greater confidence in the valuation and reporting process will also continue to be differentiators.

   Send article as PDF   

admin Finance derivatives, funds, reporting, risk