CDS suits

Bloomberg reports:

Citigroup Inc. and Wachovia Corp. were sued by a hedge fund claiming the banks wrongly forced it to pay more than necessary on insurance derivatives contracts.

VCG Special Opportunities Master Fund Ltd., an Isle of Jersey, U.K.-registered fund, claimed Citigroup asked it to deposit additional sums as collateral for the contracts, eventually costing it about $18 million, according to a lawsuit filed Feb. 14 in Manhattan federal court. The hedge fund, previously called CDO Plus Master Fund Ltd., made similar claims against Wachovia in an earlier complaint.

This is the tightrope prime brokers are walking at the moment. Be too generous on margin, and you don't have enough collateral if the fund fails. Be too tight, and they sue you. In ordinary markets at least if you are within the bid/offer you have some protection. But in current markets, there is no bid or offer, often, which makes life rather more difficult.