Margin lock-up: Difference between revisions
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{{a|pb|}}Notwithstanding all the [[Event of Default|apocalyptic rights]] I have given myself in our {{pbprov|prime brokerage agreement}}, I agree not to increase my [[initial margin]] requirements on any product or boost any of my [[interest rate|financing rates]] with out X days notice, or any of the apocalyptic events I mention in this here [[margin lock-up]] — let’s call these | {{a|pb|}}Notwithstanding all the [[Event of Default|apocalyptic rights]] I have given myself in our {{pbprov|prime brokerage agreement}}, I agree not to increase my [[initial margin]] requirements on any product or boost any of my [[interest rate|financing rates]] with out X days notice, or any of the apocalyptic events I mention in this here [[margin lock-up]] — let’s call these [[lockup termination event]]s — have come about. | ||
===Lockup termination events=== | |||
[[Lockup termination event]]s should be more sensitive than outright EODs and ATEs under the ISDA and PB docs. In practice, currently, they tend not to be. | |||
Seeing as outright [[Event of default|default]] justifies total [[close-out]] of the whole relationship; terminating a lockup — which is just really un-suspending legal rights you previously suspended — should be a far less drastic option: an intermediate step which becomes available well ahead of (and in part to help avoid) the “nuclear option” of deep-sixing the entire relationship. | Seeing as outright [[Event of default|default]] justifies total [[close-out]] of the whole relationship; terminating a lockup — which is just really un-suspending legal rights you previously suspended — should be a far less drastic option: an intermediate step which becomes available well ahead of (and in part to help avoid) the “nuclear option” of deep-sixing the entire relationship. | ||
If the basic premise of a [[PB]] relationship is that the [[prime broker]]’s unilateral right to immediately raise [[Initial margin|margin]] means the [[prime broker]] can precipitate a [[failure to pay]]<ref>''or'' satisfactorily increase its margin buffer, which by any rational lights has to be a better outcome for all concerned than total [[close-out]], right?</ref> on any day, then economically that is all the [[prime broker]] should need. That margin raising right represents an evergreen termination right. It ought, you would think, render the other usual economic<ref>As opposed to nefarious behaviour [[Event of default|EOD]]s: breaching regulations, being subject to [[OFAC]] sanctions, taking the Lord’s name in vain etc.</ref> [[EOD]]s/[[ATE]]s ([[NAV trigger]]s, [[key person]] provisions) are somewhat moot. | If the basic premise of a [[PB]] relationship is that the [[prime broker]]’s unilateral right to immediately raise [[Initial margin|margin]] means the [[prime broker]] can precipitate a [[failure to pay]]<ref>''or'' satisfactorily increase its margin buffer, which by any rational lights has to be a better outcome for all concerned than total [[close-out]], right?</ref> on any day, then economically that is all the [[prime broker]] should need. That margin raising right represents an evergreen termination right. It ought, you would think, render the other usual economic<ref>As opposed to nefarious behaviour [[Event of default|EOD]]s: breaching regulations, being subject to [[OFAC]] sanctions, taking the Lord’s name in vain etc.</ref> [[EOD]]s/[[ATE]]s ([[NAV trigger]]s, [[key person]] provisions) are somewhat moot. | ||
===Scope creep=== | |||
Careful not to let the scope of your margin lockup creep into other areas. It is one thing to give the client comfort that you won’t precipitously inflate its costs of borrowing and trading; quite another to promise not to exercise contractual rights to reduce risky positions should market or risk situations worsen, or grant some sort of facility to fill orders that a client might send. Of course, all other things being equal you’ll want to — that’s the [[commercial imperative]], after all — but you shouldn’t ''have to''. Some cheeky counsel try to sneak these things into a lockup. | |||
{{ref}} | |||
Latest revision as of 12:21, 15 January 2020
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Prime Brokerage Anatomy™
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Notwithstanding all the apocalyptic rights I have given myself in our prime brokerage agreement, I agree not to increase my initial margin requirements on any product or boost any of my financing rates with out X days notice, or any of the apocalyptic events I mention in this here margin lock-up — let’s call these lockup termination events — have come about.
Lockup termination events
Lockup termination events should be more sensitive than outright EODs and ATEs under the ISDA and PB docs. In practice, currently, they tend not to be.
Seeing as outright default justifies total close-out of the whole relationship; terminating a lockup — which is just really un-suspending legal rights you previously suspended — should be a far less drastic option: an intermediate step which becomes available well ahead of (and in part to help avoid) the “nuclear option” of deep-sixing the entire relationship.
If the basic premise of a PB relationship is that the prime broker’s unilateral right to immediately raise margin means the prime broker can precipitate a failure to pay[1] on any day, then economically that is all the prime broker should need. That margin raising right represents an evergreen termination right. It ought, you would think, render the other usual economic[2] EODs/ATEs (NAV triggers, key person provisions) are somewhat moot.
Scope creep
Careful not to let the scope of your margin lockup creep into other areas. It is one thing to give the client comfort that you won’t precipitously inflate its costs of borrowing and trading; quite another to promise not to exercise contractual rights to reduce risky positions should market or risk situations worsen, or grant some sort of facility to fill orders that a client might send. Of course, all other things being equal you’ll want to — that’s the commercial imperative, after all — but you shouldn’t have to. Some cheeky counsel try to sneak these things into a lockup.