ZwuHave you ever worked for a hedge fund or a broker? I am not...

Zwu

Have you ever worked for a hedge fund or a broker? I am not sure but if you had you would know what an ISLA agreement is. Essentially it is an agreement that facilitates the activities of a hedge fund by basically setting them up. Any purchases and sales for the hedge fund are made by MS in its own right and then "swapped" out to the hedge fund via a lending and purchase agreement. This is how the hedge fund gets to effectively borrow from the primebroker in this case MS.

So what has happened in this case is that the hedge fund told MS too buy 48m GNS shares which they did. MS now legally owns the shares and has to report a substantial shareholder notice in their own name as legally they own the shares. But what they do is under the ISLA agreement (basically a standing agreement which covers all buys and sells transacted on behalf of the hedge fund) they "swap" out the exposure (i.e transfer the price movement risk) to the hedge fund....this will show up as a borrowing and lending transaction with the hedge fund borrowing and MS lending.

So lets say they paid 30c per GNS shares so the total cost of the 48m is about $15m. MS pays $15m for the shares but lends them to the hedge fund in return for say $3m in margin. So the loan may be $12m (these are rough numbers). the hedge fund now bears the price risk. If the GNS price falls to zero then the GNS shares are worth zero. MS is out of pocket by the $12m they lent to the hedge fund who would be liable to pay that back to them. On the other hand if the GNS price doubles and the stake is worth $30m the hedge fund still only has to pay $12m to MS for the loan and pockets the $15m as profit.

There is no shorting by MS. They bought the shares in their own name, filed a substantial notice but at the same time swapped out the shares and price risk to the hedge fund. MS effectively owns no shares even though they file a notice. The hedge fund effectively owns the shares under the swap agreement.

I understand these transactions are tricky to understand but it is important not to double count what has gone on.

Lord