Haynes and Boone's Newsroom

Analyzing the Risks of Offshore Financing and the Impact of Lehman Brothers International, Regulation X, and Portfolio Margining
02/01/2009
Craig S. Unterberg

With contributions from Autumn Smith

Introduction

A significant amount of the United States (the “U.S.”) managed hedge funds and investment vehicles conduct their margin lending transactions through different arrangements of offshore financing. A typical offshore financing situation occurs when an offshore entity borrows from a foreign broker-dealer or an offshore lender. One of the primary benefits of using offshore financing is that the offshore broker-dealer or lender, as applicable, is outside the scope of Regulations T  and U  issued by the Federal Reserve Board (the “Board”) and the offshore entity is outside the scope of Regulation X  issued by the Board. By being outside the scope of these margin regulations, the offshore entity is able to obtain margin credit without having to abide by the historically strict collateral requirements of the U.S. margin regulations.

Based on the recent events in the Lehman Brothers International (Europe) (“LBIE”) insolvency administrations in Europe, the anticipated heightened scrutiny of the margin rules, and the implementation of portfolio margining by the Securities and Exchange Commission (the “SEC”) in 2006, this article sets forth certain issues that investment managers should consider before entering into, or continuing with, offshore margin financing. In the end, these issues provide a strong case for domestic investment managers to consider repatriating their margin transactions to the U.S. and utilizing portfolio margining. 

The complete article appears in the PDF below.

© Bloomberg Finance L.P. 2009. Originally published by Bloomberg Finance LP. Reprinted by permission.