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Credit, Derivatives & Structured Products

The Brattle Group provides consulting and expert testimony on the theory, valuation, use, and regulation of derivatives. The Brattle Group’s staff and affiliates include professors and former practitioners in risk management and derivatives; specifically: a Nobel Prize winning economist, a former director of risk management at a large broker-dealer, and an author of a leading graduate level textbook on risk management and derivatives. We regularly work in collaboration with industry experts including former traders, risk managers, and compliance professionals.

The range of derivatives instruments we are retained to analyze and value is wide and can be originated and traded a number of different ways: exchange-traded like a futures contract, over-the-counter as a counter party’s obligation (such as a swap), publicly offered as a trust-issued claim against the trust’s own assets like a collateralized mortgage obligation (CMO), or a hybrid instrument such as a synthetic collateralized debt obligation (CDO) sold as a 144A private placement. Our analysis often concerns how derivatives were used and whether for reducing financial risk through hedging or for taking risk as part of an investment strategy. The Brattle Group experts analyze the economic value and performance of instruments in terms of the underlying assets, payment conditions, and trading venue. They also evaluate suitability and performance of derivatives whether used as investments or to hedge.

NEWS

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.

NEWS

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.

Engagements
REPRESENTATIVE ENGAGEMENTS

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

Role of derivatives in hedge fund collapse
On behalf of an investor in a failed hedge fund, The Brattle Group applied financial pricing theory to value derivative instruments whose values were tied to the performance of underlying asset portfolios, including CDOs, CDOs-squared, and credit default swaps. We analyzed the fund’s investment decisions, compliance with the investment guidelines, and performance reporting.
Hedging interest rate exposure of accounts receivables
The Brattle Group evaluated the economic performance of a series of Treasury security short-sales purportedly used to hedge changes to the value of an accounts receivable portfolio as interest rates varied.
Total return swap market-to-market dispute
In a dispute between a hedge fund and a major bank, The Brattle Group was retained to analyze the marking to market and eventual liquidation of a portfolio of syndicated loans underlying a total return swap. We worked with a former loan trader to discuss the liquidity of the secondary loan market in the aftermath of the Lehman Brothers bankruptcy filing, evaluate the reasonability of the bank’s method of marking to market the portfolio assets and of liquidating the loan portfolio through a BWIC auction, and estimate the market value the loan portfolio.
Repo market margin call valuation dispute
The Brattle Group has been retained to provide expert testimony in a dispute between an investment fund and a major broker-dealer involving the repo financing of a multi-billion dollar portfolio of mortgage-backed securities. Our experts evaluated the procedure followed by the broker-dealer to issue margin calls and handle valuation disputes in light of market practice and the provisions of the Master Repurchase Agreement, evaluated the marking to market and eventual liquidation of the MBS portfolio, and calculated damages from the early termination of the repo financing arrangements.
Long Term Capital trading and valuation analysis
The Brattle Group evaluated the structured finance transactions, business practices and trading strategies, including the use of derivatives, of Long Term Capital Management. This involved valuation of assets including securitized lease payments from computers, box cars, trucks, aircraft and telecommunication equipment, over-the-counter derivatives on liquid and illiquid instruments, and a private-placement transaction.
Foreign currency options modeling
In connection with litigation, The Brattle Group applied option pricing theory in a scenario analysis to estimate the risks and likelihoods that foreign currency options would be exercised.
Derivatives valuation and disclosure issues
The Brattle Group has assisted clients in litigation matters involving the proper application of mark-to-market and derivative accounting in the energy industry. Specifically, we provided litigation support in securities litigation matters regarding the valuation of energy contracts and the application of accounting principles to the proper disclosure of power derivatives and hedges.
Assessment of AIG’s risk management
In Starr v. US, The Brattle Group evaluated the risk management practices of AIG prior to the credit crisis to evaluate the extent to which its risk controls and reporting were consistent with customary practices. A Brattle expert provided testimony evaluating AIG’s management of its risk exposure to subprime mortgage defaults and the timing of its response to the increase in defaults prior to the credit crisis.
Optimization of trading strategies and hedging
The Brattle Group has advised on all aspects of risk management techniques and hedging programs adopted by power companies. We have analyzed the efficiency of trading strategies and developed estimates of critical option valuation parameters, such as trend, volatility, term structure, and correlations of the future prices of electric power and the various fuel indexes. We have assessed the financial risks of energy company portfolios consisting of production facilities, purchase/sale contracts, and retail customers, and quantified the underlying price and volumetric and operational risk exposures.
Experts
Principals
Academic Advisor & Other Outside Experts
Michael A. Goldstein
Academic Advisor
Babson College
View Bio
James E. Hodder
Outside Expert
University of Wisconsin School of Business
View Bio
Paul Pfleiderer
Outside Expert
Stanford Graduate School of Business
View Bio
Ilya A. Strebulaev
Outside Expert
Stanford University
View Bio
Suresh M. Sundaresan
Academic Advisor
Columbia University
View Bio
Michael S. Weisbach
Academic Advisor
The Ohio State University
View Bio
Senior Associates
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
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.

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.