A broker-dealer in over-the-counter (OTC) derivative instruments may face unexpected problems if it is asked to document transactions with sub-accounts or sleeves, rather than the investment fund of which it is a part, under an industry standard netting agreement subject to US law. If credit analysis is done at the level of the investment fund, but transactions and documentation are executed at the sub-account level, the usual mechanics and operational flows under the industry standard document lead to some unintended consequences; the expected protections under these documents may not be available.
OTC derivative trading has exploded in recent years. In 2003, the International Swaps and Derivatives Association (Isda) reported that over 90% of the world's 500 largest companies and over 94% of US companies included in the largest 500 used some form of derivatives trading. One group contributing to this increased use of OTC derivative trading has been pooled investment...