Swaps Payout Is a Windfall for Funds 

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Market participants, lawyers will divide up $1.9 billion settlement

Here’s another way some Wall Street debt traders are making money: suing.

Several hedge funds and other big credit investors are in line for payouts of tens of millions of dollars or more, thanks to a lawsuit challenging how credit derivatives were traded in the years after the financial crisis.

BlueCrest Capital Management LLP and BlueMountain Capital Management LLC stand to be among the biggest beneficiaries from the suit’s recent nearly $1.9 billion settlement, according to preliminary estimates from people familiar with the case.

Each could receive as much as $150 million or more, those people said, cautioning that the figures could deviate in either direction. (BlueCrest recently said it was transitioning away from managing money for outside investors.)

Whether various funds will receive money, and how much, is now becoming the talk of the town among investors that have actively traded in credit-default swaps, essentially bets on the likely repayment of a bond or loan. The money is expected to be paid in the second half of this year, according to the people familiar with the case, which is being pursued as a class action.

Some funds are only now starting to realize what might be coming to them. It hasn’t been clear who was eligible to be a claimant in the class or when distributions would be made.

Some potential beneficiaries “I think have no idea that it’s coming,” said a fund executive familiar with the case.

Hedge funds, asset managers, pension funds and other investors involved in the suit are expected to get an early glimpse of where they stand on Monday, according to people familiar with the case. They are to receive access to a website showing the proposed methodology for divvying up the settlement. That information will help funds to get a closer idea of their payouts, some of the people said, adding that the methodology hasn’t been finalized and is complex.

Individual payouts from the suit—the aggregate amount is one of the largest in a private antitrust case of its kind—will be a welcome boost for funds still reeling from rocky markets in 2015. Many fund firms have been burned by investments in distressed corporate bonds and wagers on energy.

Other firms in line for large sums include funds affiliated with Anchorage Capital Group LLC, BlackRock Inc., Bridgewater Associates LP, Pacific Investment Management Co., and Saba Capital Management LP, the people said.

The exact payouts won’t be known by funds for weeks. Funds that hope to collect must file claims, which will have to be audited and qualified by a claims administrator. The final settlement of the case must be approved by a court.

A dozen of Wall Street’s biggest banks agreed last year to settle accusations that they conspired to prevent competition in the credit-derivatives markets, according to the complaint.

The suit alleged that the banks overcharged clients and, together with two other institutions, delayed credit derivatives from being openly traded on exchanges, where prices would be more transparent. In settling, the defendants didn’t admit or deny fault. The process that moves forward Monday will allocate payouts from that suit.

There are up to 14,000 potential class members who could become eligible claimants if they traded with the defendant banks in the time period of the class, from January 2008 to September 2015, and meet other criteria. Some could opt out, for example, if potential legal and administrative fees dwarf their likely share.

The plaintiff law firms, Quinn Emanuel Urquhart & Sullivan LLP and Pearson, Simon & Warshaw LLP, plan to file with the court for fees of up to 14% of the total pot, some people said.

The methodology for awarding payouts will likely reflect several considerations, including whether the swaps were based on individual borrowers or indexes, the face amount traded and what year the trades were entered, said people familiar with the case.

Those working as experts on the case include the Berkeley Research Group consultancy and Stanford University finance professor Darrell Duffie. According to court filings, Mr. Duffie has conducted substantial research on credit derivatives and wrote a book on “dark” markets.

Mr. Duffie said in an interview the case has implications for investors crying foul about other Wall Street instruments that don’t trade on exchanges. One lawsuit already filed concerns derivatives called interest-rate swaps.

“Some of our existing markets are better than others from the viewpoint of broad access, transparency and competitiveness,” said Mr. Duffie.

Source: WSJ – Swaps Payout Is a Windfall for Funds

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