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, including 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.
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 they were used for reducing financial risk, through hedging, or for taking risk as part of an investment strategy.
Brattle’s 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. We are frequently retained to assist in risk management activities, particularly in the energy sector, advising on the risks an enterprise should assume and those that it should avoid; on management control and reporting structures that monitor and measure risks; and on practices (insurance, hedging, counterparty credit reviews, etc.) that are used to manage the risks.
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.
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.
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.
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.
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 provide 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.
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.
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 (MBS). 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.
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.
For a U.S. gas and electric utility, The Brattle Group helped design, implement, and obtain regulatory approvals for a natural gas procurement fuel hedging program. We developed a model to determine how gas forward prices evolve over time and combined it with a statistical model of the term structure of gas volatility to simulate the future uncertainty in the annual cost of gas under alternative strategies for its procurement.
The Brattle Group assisted several utilities in the development of valuation models for the comparison of ask prices to fair market values for option contracts. We have developed techniques for estimating forward and spot market price parameters on a consistent basis, which are then often used in risk management or valuations models.
The Brattle Group 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 option 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.
In an investor suitability case, we estimated economic damages to an overseas feed and flour mill resulting from an alleged breach of fiduciary duty in the execution of grain forward contracts. Reliance, arbitration, and lost profits damage theories were all evaluated. Our analysis drew on information from market conditions, firm-specific data, and the terms of the forward contracts in dispute.