The ongoing financial peril of Knight Capital provides an opportunity to reflect on steps investors should consider whenever a financial intermediary or counterparty encounters financial difficulties. The issues clients face in such a case depend very much on the facts: for example, some intermediaries are execution-only brokers, some are prime brokers, others are derivatives counterparties. But we have found that there are a number of steps clients might take that can be effective in many if not all of these fact patterns. Here is a brief, representative list of steps you might want to consider when confronted by an intermediary in financial distress.
- Who am I doing business with? – Almost all large financial intermediaries have myriad affiliates, and you may well have exposure to many of them. The nature and number of those affiliates can have a substantial effect on your credit exposure. You should take the time to know the various affiliates you are dealing with, the lines of business you have with them, and how much. Bankruptcy and insolvency regimes in the US and foreign jurisdictions differ greatly, and you should keep in mind that the steps you may need to take, and your ultimate legal and financial position, can depend very much on the jurisdiction where you are required to bring your claim.
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