Where hedges tend to cause trouble
Most over-the-counter hedges are documented under a master agreement, a negotiated schedule, and individual confirmations, sometimes with a credit support annex governing collateral. Problems often surface when a loan is refinanced or repaid early and the related swap has to be unwound at a cost the borrower did not expect. An event of default under the loan may also be an event of default under the hedge, which lets the counterparty close out positions. The close-out amount is calculated under the agreement's methodology, and disputes about that calculation are common. Companies sometimes discover that a hedge did not match the risk it was meant to cover, which raises questions about the advice they received and what the documents disclosed.
Documents and data to keep together
Keep the executed master agreement and schedule, every confirmation, any credit support documents, and the loan agreement if the hedge was tied to financing. Collateral call notices and the counterparty's valuation statements should be stored with the dates they arrived, because response windows can be short. Emails and recorded calls about why a hedge was recommended matter if suitability or disclosure is later questioned. Internal approvals and the hedging policy approved by your board help show what the company intended. If an early termination notice has been served, the valuation inputs and dealer quotations the counterparty relied on become the center of the review.
What we look at first
We begin by identifying which documents govern and whether a termination event or default has actually occurred. If you are planning a new hedge, we look at how it interacts with your credit agreement, including whether it shares collateral with the lenders and how a prepayment would be handled. Federal swap rules impose reporting and, for some trades, clearing obligations, and commercial users hedging their own risk can often rely on exceptions that carry conditions of their own. For a disputed close-out, we review the calculation and the notice steps the agreement requires. Accounting treatment of a hedge is a separate question for your finance team and auditors, and we coordinate with them rather than treat the legal documents as settling it.
