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Credit, Derivatives & Structured Products

Derivatives, structured products, and credit instruments are inherently complex and often difficult-to-value components of the financial system. Our experts have extensive expertise in this space, and are deeply engaged with market participants shaping the evolution of related products, market standards, and regulations across geographic jurisdictions.  

Our clients engage us to consult and to provide expert opinions on a wide range of issues, including evaluating various types of financial engineering products, and investigating broader issues such as possible market failure and manipulation. We have examined several classes of structured products, such as mortgage and asset-backed securities; collateralized debt and loan obligations; exchange-traded and bespoke derivatives like futures, options, swaps, and volatility products; and credit default swaps and tranches of credit indices. Brattle’s experience with these transactions spans global financial markets and includes our expertise in transactional and trading disputes. We have also applied derivative securities valuation techniques to examine the dynamic relationship between physical or financial asset prices and their derivatives, with a particular focus on the energy sector.

We have a deep understanding of the complexity of the key economic concepts and models underpinning the pricing and risks of the disputed transactions. Our team of industry thought leaders include former traders, risk managers, compliance and other industry professionals, and academics. This, coupled with highly experienced and collaborative teams and a rigorous peer review process, means that our work, consulting or testifying, is always of the highest quality with clear and compelling explanations.

Our consultants are currently engaging with market participants on a number of emerging issues. We have been working closely with the International Swaps and Derivatives Association (ISDA) and their counsel to develop and implement a framework of fallback rates for derivatives tied to the London Interbank Offered Rate (LIBOR), which is expected to cease after 2021. This work, which encompasses a group of other IBOR benchmarks, impacts trillions of dollars across global derivatives markets.

AREAS OF EXPERTISE

  • Analysis and interpretation of agreements for structured finance products
  • Use of financial engineering products in asset management, including suitability, fee structure, and disclosures to investors
  • Evaluation of the full spectrum of credit securities, from investment grade to distressed, and from vanilla to structured credit instruments
  • Alternative interest rate and credit benchmarks
  • Valuation of illiquid derivative securities, credit instruments, and structured products
  • Assessment of the use of derivatives in risk management
  • Regulatory investigations
  • Bilateral trading vs. exchange-cleared products and collateral considerations
  • Structure and assessment of value for complex financial engineering products including assessment of damages  
Engagements
REPRESENTATIVE ENGAGEMENTS

Below is a list of representative engagements for our Credit, Derivatives & Structured Products practice.

Alternative interest rate benchmarks

To prepare for a permanent discontinuation of certain key interbank offered rates and the subsequent amendment of standard documentation to implement fallback rates for derivatives, ISDA engaged Brattle to analyze market participant responses to ISDA’s presented approaches and frameworks. Our team reported areas of consensus and identified areas of potential concerns, ensuring that ISDA and market participants have a comprehensive understanding and a transparent picture of the responses.

Valuation of illiquid structured finance securities

Brattle experts consulted to and testified on behalf of the DOJ in the criminal case, U.S. v. Ahuja, et al. In this matter, hedge fund managers were accused of overstating the value of illiquid structured finance securities. We summarized and analyzed contemporaneous data, including data relative to various pricing benchmarks, to establish that the hedge fund managers selectively relied on a subset of available information about the value of the securities in question to over-value them. Brattle experts testified at trial and presented this analysis to the court and the jury. The hedge fund managers were found guilty, and the court cited Brattle’s analysis and testimony as a key component in this determination and sentencing.

Management of collateralized debt obligations

Brattle experts helped secure a favorable outcome at trial in a case involving the interpretation of governing agreements for a collateralized debt obligation (CDO). Most of the underlying assets were in default following the financial crisis. The issue was whether the language in the CDO indenture required the collateral manager responsible for managing the securities, Triaxx Asset Management LLC, to sell certain defaulted assets that it had not yet sold. A Brattle expert submitted written reports and testified at trial on the interpretation of the governing documents and the core features of the securities. The Court found the expert’s testimony credible and supported a judgment in the client’s favor that the defaulted assets must be sold.

Leveraged hedge fund portfolio broker-customer dispute

Brattle was retained to testify at a FINRA arbitration in relation to a failed leveraged hedge fund investment that was liquidated by the leverage provider following a knockout event during the credit crisis. An individual investor switched from a margin account to use an options contract structure to bet on the performance of a customized portfolio of hedge fund investments. The dispute concerned whether the structure was suitable and whether investors understood its operation and how it differed from a margin account. Testimony was developed in connection with causation and damages on differences in the operation of the option structure compared to a margin account; the effect of limitations on fund selection on performance; and how the knockout event was triggered.

A financial institution's exposure to alleged LIBOR manipulation

Brattle provided consulting and expert support on behalf of a financial institution related to the impact of alleged LIBOR manipulation. Our team analyzed exposures of the financial institution's global trading desks' positions across both derivatives and cash products, and performed sensitivity analyses with respect to LIBOR. Brattle's client favorably settled the matter. 

Analysis of a rating agency's credit models

Brattle worked with the Department of Justice (DOJ) in a landmark suit involving whether Standard & Poor’s knowingly published inflated ratings for large mortgage-backed securities that ultimately turned toxic, exacerbating the financial crisis. Brattle worked with the DOJ from the early stages of the case to analyze S&P’s ratings methodology, potential changes to its ratings model inputs, and their impact on investment decisions and financial markets. Brattle consultants advised the DOJ and, separately, worked with testifying experts on both the ratings models and their macroeconomic implications. Our work included rigorous analyses of S&P’s internal documents and models to document the sensitivities of ratings on RMBS and CDOs to alternative assumptions, versions of the model, and the rationale for the qualitative adjustments to the quantitative model results. The case ultimately resulted in a $1.4 billion settlement. 

Valuation of a portfolio of credit derivatives

Brattle worked on behalf of a hedge fund manager in a case against the estate of Lehman Brothers related to the valuation of a portfolio of complex derivatives, following the latter’s filing for Chapter 11 protection. Brattle supported an academic expert, who opined on the reasonableness of the methodology that the hedge fund manager (the non-defaulted counterparty) used to value its claims on the portfolio. Our team analyzed the contemporaneous credit market conditions at the time of the Lehman bankruptcy, and in the context of the relevant ISDA Master Agreements between the two parties. The court found favorably for our client. 

Experts
Publications
Report
Summary of Responses to the ISDA 2020 Consultation on How to Implement PreCessation Fallbacks in Derivatives
May 14, 2020
Prepared for International Swaps and Derivatives Association (ISDA)

In this report, Brattle summarized the responses to ISDA’s February 24, 2020 consultation, 2020 Consultation on How to Implement Pre-Cessation Fallbacks in Derivatives. Brattle’s report documented that a majority of respondents supported including pre-cessation and permanent cessation fallbacks without optionality or flexibility in the amended 2006 ISDA definitions for LIBOR. In explaining their responses, several market participant respondents, including from both those who answered “Yes” and those who answered “No”, cited the need for consistency across asset classes and between cleared and non-cleared derivative markets.

Report
Anonymized Summary of Responses to the ISDA Supplemental Consultation on Fallbacks in Derivatives Referencing EUR LIBOR and EURIBOR and Other Less Widely Used IBORs
March 5, 2020
Prepared for International Swaps and Derivatives Association (ISDA)

In this report, Brattle summarized the responses to ISDA’s December 18, 2019 consultation, Supplemental Consultation on Spread and Term Adjustments, including Final Parameters thereof, for Fallbacks in Derivatives Referencing EUR LIBOR and EURIBOR, as well as other less widely used IBORs. Brattle’s report documented that the majority of market participant respondents would be able to transact using definitions for EUR LIBOR and EURIBOR (as well as other less widely used IBOR benchmarks) that incorporate fallback rates based on the same methodologies as in other benchmarks.

Report
Summary of Responses to the ISDA Consultation on Final Parameters for the Spread and Term Adjustments
November 15, 2019
Prepared for International Swaps and Derivatives Association (ISDA)

In this report, Brattle summarized the responses to ISDA’s September 18, 2019 consultation, Consultation on Final Parameters for the Spread and Term Adjustments in Derivatives. The report documented that a majority of respondents preferred a historical median approach over a five-year lookback period, to not include a transitional period, and to not exclude outliers or negative spreads in the spread adjustment calculation.

Article
Derivatives' Roles in Manipulation
October 2017
Published in the Futures and Derivatives Law Report, Volume 37, Issue 9

The article, published in the October 2017 issue of The Journal of the Law of Investment & Risk Management Products Futures & Derivatives Law Report, discusses the role derivatives play in market manipulation.

Article
Latest SEC Report on Rating Agencies Resurrects Questions Concerning Conflicts of Interest
February 18, 2016
Pavitra Kumar
Published in Practice Points, a publication of the ABA's Securities Litigation Committee
News & Knowledge
July 29, 2020
ISDA Publishes Brattle-Prepared Report on Bloomberg/ISDA IBOR Fallback Rate Adjustments Rule Book

In a July 2020 report, “Report on Bloomberg/ISDA IBOR Fallback Rate Adjustments Rule Book,” a team of Brattle consultants assessed whether Bloomberg’s implementation of the calculations and the definitions of the different terms and concepts discussed in the Rule Book are consistent with the information provided in a series of ISDA consultations and the preferences of market participants summarized by Brattle for ISDA in a series of reports.

July 27, 2020
ISDA Publishes Brattle-Prepared Summary Reports on IBOR Benchmark Fallback Rates

On May 14, 2020 the International Swaps and Derivatives Association (ISDA) published the sixth in a series of reports independently prepared for ISDA by Brattle consultants. Each of these six reports followed an associated consultation starting with the first ISDA consultation on July 12, 2018.

July 10, 2020
Brattle Economists Author Article on the Potential for Collateralized Loan Obligation Litigation amid the COVID-19 Pandemic

Brattle Principal Ioannis Gkatzimas and Associate John Anthony have co-authored an article for Law360 titled “Crisis May Trigger Collateralized Loan Obligation Litigation.” The article explores litigation risks for the various parties involved in collateralized loan obligation (CLO) funds due to the economic downturn triggered by COVID-19.

October 24, 2019
ISDA Publishes Brattle-Prepared Summary Report on IBOR Benchmark Fallbacks

To prepare for a permanent discontinuation of certain key interbank offered rates (IBORs), the International Swaps and Derivatives Association (ISDA) is in the process of amending its standard documentation to implement fallback rates for derivatives.

April 12, 2019
Ryan Leary Presented at DebtCon3

Brattle Associate Ryan Leary spoke at the Third Interdisciplinary Sovereign Debt Research and Management Conference, DebtCon3, which was held April 11-12 at Georgetown Law in Washington, DC.

January 17, 2018
Brattle Economists Author Article on Derivatives' Roles in Manipulation

Brattle Principal Shaun Ledgerwood and Senior Associate Jeremy Verlinda have authored an article published in the October 2017 issue of The Journal of the Law of Investment & Risk Management Products Futures & Derivatives Law Report, which discusses the role derivatives play in market manipulation.

September 26, 2017
John Anthony to Participate in Global Credit Data Analytics Workshop

Brattle Associate John Anthony will participate in the upcoming Global Credit Data conference, taking place September 25-26th, 2017 in New York, NY.

February 18, 2016
Pavitra Kumar Comments on SEC Report on Rating Agencies in ABA's Practice Points

Brattle Senior Associate Pavitra Kumar recently contributed to Practice Points, a publication of the ABA’s Securities Litigation Committee, on the Securities and Exchange Commission’s (SEC) 2015 summary report of the Nationally Recognized Statistical Rating Organization (NRSRO).

July 24, 2014
Securities and Commercial Litigation Expert Ioannis Gkatzimas Joins The Brattle Group

Securities and commercial litigation expert Ioannis Gkatzimas has joined the firm’s San Francisco office as a principal. Mr. Gkatzimas has significant experience in a wide range of finance and securities litigation matters.