OTC derivatives processing: Challenges and opportunities facing asset servicers

Abstract

This paper examines the lessons learned and ten specific 'red flags' that can be extracted from a case study analysis of recent hedge fund blow-ups, with emphasis on the Amaranth Advisors loss event. An in-depth discussion is included on the recent US Senate report on Amaranth and the role that electronic unregulated markets played in that breathtaking event. Through a systematic analysis of Amaranth and other events, a list of criteria is established for evaluating the risk profile of an individual fund from the perspective of investors or other exposed entities, such as service providers. These recommendations include an analysis of the mix of trading activity on regulated versus unregulated exchanges, the role that models play in day-to-day management, risks inherent in promoting a star culture and attention to market practices.