Conflicts of Conflicts of Interest between Interest between

Prime Brokers and Prime Brokers and Hedge FundsHedge FundsKate WormaldKate Wormald

Oesa LimitedOesa Limited

Prime BrokersPrime Brokers

Capital Capital IntroductioIntroductionn

Prime Prime

BrokerBroker

Direct Direct investmentinvestment

MiscellaneMiscellaneousous

ServicesServices

Stock Stock loanloan

FuturFutureses

OTCOTC

CleariClearingng

CustoCustodydy

ReposRepos

Cash Cash tradintradingg

AdministraAdministrationtion

Hedge Fund StructureHedge Fund Structure

FeederFeeder

FundFund

Master Master

FundFund

FeedeFeederr

FundFund

CaymaCaymann

ManagManagerer

InvestmInvestmentent

ManagerManagerFSA FSA registeredregistered

InvestorsInvestors

Relationship between Prime Relationship between Prime Broker and Hedge FundBroker and Hedge Fund

MasterMaster

FundFund

Prime Prime BrokerBroker

AdministraAdministratortor

CCaymanayman

ManageManagerr

InvestmeInvestment nt ManagerManager

Reality CheckReality Check

Investment Investment ManagerManagerPrime Broker Prime Broker

ConflictsConflicts

Capital Introduction – PB introduces Capital Introduction – PB introduces Investors to the Fund in return for Investors to the Fund in return for what?what?

Direct Investment by PB or an affiliateDirect Investment by PB or an affiliate Provision of Start Up services ranging Provision of Start Up services ranging

from Tax advice, FSA applications, from Tax advice, FSA applications, legal assistance, what next?legal assistance, what next?

Administration servicesAdministration services Trading services Trading services

So what are the potential So what are the potential ConflictsConflicts

Investors – Introduced to Fund but Investors – Introduced to Fund but relationship is with the Investment relationship is with the Investment Manager Manager

Start Up services – Independence Start Up services – Independence Direct investment – conflict between Direct investment – conflict between

commissions on trading side and returns commissions on trading side and returns PB documents protect PB charge assets PB documents protect PB charge assets

how does this fit in with abovehow does this fit in with above Rights to sell at their discretionRights to sell at their discretion Use of assets comminglingUse of assets commingling

Compliance concernsCompliance concerns

Treating customers fairly - who is the Treating customers fairly - who is the customer Investor or Investment customer Investor or Investment managermanager

Money Laundering – who is responsibleMoney Laundering – who is responsible Due Diligence – who is responsibleDue Diligence – who is responsible COMC/MAD – STRCOMC/MAD – STR Dealing Ahead CustomerDealing Ahead Customer Research and Conflicts and MAD Research and Conflicts and MAD

disclosuresdisclosures

Legal RiskLegal Risk

What if there is a problem with the What if there is a problem with the Investment Manager?Investment Manager?

What if an Investor sues?What if an Investor sues? What if there is Money Laundering What if there is Money Laundering

or COMC or other regulatory or COMC or other regulatory investigations?investigations?

ConclusionConclusion

Caution is needed in offering ever Caution is needed in offering ever increasing number of servicesincreasing number of services

Chinese WallsChinese Walls Different entitiesDifferent entities New regulation?New regulation?