FinValley 5.0 Case Study

Yellow Oak Hedge Solutions
Introduction over-the-counter derivatives transactions.

The Agreement, which is published by ISDA,
Yellow Oak Hedge Solutions is a leading hedge outlines the terms to be applied to a derivatives
fund with an AUM of $35 billion USD with transaction between two parties, typically a
expertise in multiple investment styles and derivatives dealer and a counterparty.
follows a multi-manager model. It has exposure in The Master Agreement itself is standard, but it
various asset classes like Commercial Real Estate, is accompanied by a customized schedule and
Financial Services companies, public equities, sometimes a credit support annex, both of
fixed income & over the counter (OTC) which are signed by the two parties in a
instruments across multiple Prime Brokers (PBs) given transaction.
and counterparties. Fund Managers invest in
multiple product/asset types including Repos, In case of a Prime Brokerage relationship, the
Equities and Over the Counter (OTCs) trades. House Margin and Reg Margin come into picture.
The Fund maintains its book of accounts in USD. These are the minimum margin account equity
that is required by a prime broker. Reg Margin
Yellow Oak has reached out to IVP to help levels are defined by law, but brokers perform
implement a technology solution for following stress testing and risk-based margining and
tasks on an operational basis: adjust the margin to calculate the House Margin.
⋅ Validating margin calls across products and Post the 2008 financial crisis, financial institutions
accounts on T-basis have been extremely cautious of the margin
requirements and as a thumb rule they
⋅ Performance tracking and hedging of follow more stringent approach in terms of
illiquid investments the requirements.
⋅ Regulatory Reporting Yellow Oak Hedge Solutions has exposure across

multiple counterparties. Each day, they get
1. Margin Calls individual account margin statements which
contain information about the margin call for the
Background
day along with details around market price
In case of a Repo transaction, funds borrow movements among other things. The fund
money and pay interest on it in exchange for the managers apply MTA (Minimum Transfer Amount)
bonds. A reverse repo transaction is opposite of and Rounding rules to come up with the final
this. The counterparties apply a haircut to the margin call amounts to the Excess/(Deficit) values
security and then lend the money to the fund. for which they generate a cash wire. This entire
process happens on a T basis.
Over-the-Counter (OTC) trades are regulated by
International Swaps and Derivatives Association On 5th August, the counterparties reported the
(ISDA). An ISDA Master Agreement is the standard positions in attached excel (<Product Type>
document that is regularly used to govern Positions tabs).
FinValley Case Study 2021

Questions Objectives
⋅ Calculate the Excess/(Deficit) based on the a. Track the performance of the investments
position level data provided. (Hint- Margin calls made at fund level
happen at account level)
b. Hedge the cash flows against USD using the
⋅ Apply relevant MTA and Rounding Rules and array of instruments provided
come up with the final Call Amount
Hedging Guidelines
(Hint – Counterparties like to receive more
and pay less) ⋅ The instruments used to hedge would be 1 year
forward and option contracts
⋅ Create a flow diagram to illustrate the entire
workflow right from receiving margin ⋅ These would be rolled over if the hedge needs
statements from counterparties to generating to be continued
margin wires
⋅ There are no existing hedges placed on the
Notes exposures of the two funds
⋅ Participants are expected to view the margin ⋅ All hedges are placed basis the present value
problem from fund's point of view and follow of future cash flows
standard sign conventions. Positive number
⋅ CIO guidelines for the month of February, 2021
indicates money to be received by the fund
from counter party, negative indicates money - Funds are expected to be operational
to be paid by the fund to counter party through Feb 2022
⋅ Participants can use Visio, PowerPoint or any - The Hedge multiple to be used for EUR :
other tool to create the flow diagram 1.50 and SGD: 1.10
- 60% of the notional exposures need to

2. Performance Tracking and be hedged by forwards and the
Hedging of Illiquid Investments remaining with option
Background ⋅ CIO guidelines for the month of May, 2021
Yellow Oak’s Illiquid investments are bracketed - Commercial real estate fund based out of
under Commercial Real Estate and Financial Euro Region would enter liquidation phase
Services Fund. Commercial Real Estate is based by Feb, 2022. Any currency fluctuations
out of Euro Region and Financial Services is based that may affect the ability of the fund to
out of Singapore. The funds are reviewed twice repay the investors should be avoided.
every year during the months of February and Hence, the EUR exposure should not be
July. Deutsche Bank is the broker to hedge over or under hedged.
exposures based out of Euro region and JP
- 60% of the notional exposures need to be
Morgan is the Broker to hedge all exposures
hedged by forwards and the remaining
based out of Asia region.
with option

⋅ CIO guidelines for the month of July, 2021 (Reporting of Derivatives Contracts) Regulations.
DTCC is the only assigned Trade Repository who
- Commercial Real Estate fund is expected to shall be accepting trades on behalf of MAS. The
enter liquidation as confirmed In May 2021. Chief Compliance Officer reached out to you with
- Hedge multiple to be used for SGD: 1.20 regard to the Fx trade done on 10 February, 2021.
- 60% of the notional exposures need to be Note: Some secondary research is necessary to
hedged by forwards and the remaining answer the questions in this section.
with option Questions
Questions ⋅ Is the Fx trade of February reportable to MAS,
⋅ Calculate actual and projected returns (Note and why?
that projected returns are for the entire deal ⋅ The CCO wants to check the capabilities of the
lifecycle and should include the actual as well team and be ready with the report. She seeks
as projected cash flows) your help in constructing the reports that can
⋅ Calculate actual and projected money multiples be sent to DTCC. Please construct the reports
(The fund calculates the MM on a cash basis that can be submitted to DTCC.
and discounting can be ignored; projected ⋅ If the EUR Fx trade was done by the European
money multiples are calculated for the entire office, what are the regulatory obligations that
deal lifecycle) needs to be fulfilled for the EUR trades?
⋅ Calculate the expected present value of Discuss the timelines too.
future cash flows ⋅ If the Firm decides to not roll forward the SGD
⋅ Determine the Hedging Schedule trades and directly go for a spot conversion for
SGD to USD in February 2022. Would the Fx
3. Regulatory Reporting trade be reportable?
Background
The Firm operates a trading office in Singapore,

and to protect itself from regulatory ambiguity all
trades concerning SGD are traded and booked by
the Singaporean entity with LEI
2Z2OHI2V6TG5AUY67W37. For Singaporean
entity there is one designated Prime Broker who
executes the Fx Trades. The assigned broker is
“J. P. MORGAN SECURITIES ASIA PRIVATE
LIMITED” with other name as “MORGAN
GUARANTY PACIFIC LIMITED”. Monetary Authority
of Singapore requires all OTC trades done to be
reported under the Securities and Futures

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Yellow Oak Hedge Solutions

Introduction over-the-counter derivatives transactions.

⋅ Regulatory Reporting Yellow Oak Hedge Solutions has exposure across

FinValley Case Study 2021

- 60% of the notional exposures need to

FinValley Case Study 2021

The Firm operates a trading office in Singapore,

FinValley Case Study 2021

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