NAV trigger: Difference between revisions
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The right to terminate a {{tag|master agreement}} as a result of the decline in [[net asset value]] of a [[hedge fund]] counterparty. Often there are three levels of trigger: Monthly; Quarterly and Annually, and you may find yourself embraced in a tedious argument about whether this should be “rolling” (that is, judged for the period from any day) or “point-to-point” - judged from a defined day to the end of the period following that day. | The right to terminate a {{tag|master agreement}} as a result of the decline in [[net asset value]] of a [[hedge fund]] counterparty. Often there are three levels of trigger: Monthly; Quarterly and Annually, and you may find yourself embraced in a tedious argument about whether this should be “rolling” (that is, judged for the period from any day) or “point-to-point” - judged from a defined day to the end of the period following that day. | ||
In practice an official [[NAV]] is only “cut” once for every “[[liquidity period]]”, and it is hard to see how a credit officer, however enthusiastic, could define an effective Net Asst Value as at any other time. | In practice an official [[NAV]] is only “cut” once for every “[[liquidity period]]”, and it is hard to see how a [[credit officer]], however enthusiastic, could define an effective Net Asst Value as at any other time. On the other hand, [[credit officer]]s don’t usually monitor NAV triggers anyway, so what do they care? | ||
All rather tiresome, and quite unnecessary if you have the right to jack up [[initial margin]] at your discretion. | All rather tiresome, and quite unnecessary if you have the right, as most [[prime broker]]s do, to jack up [[initial margin]] at your discretion<ref>I know, I know, there may be a [[margin lockup]].</ref>. | ||
Even though generally they’re not actively monitored, [[NAV trigger|NAV triggers]] lead to the tedious cottage industry of [[waiver|waiving]] breaches of the NAV trigger. This is because while a prime broker’s credit department doesn't have the bandwidth to be monitoring thousands of NAV triggers, the hdge fund who has granted them will, and if it does suffer a significant drawdown, it won’t like an unexploded {{isdaprov|Additional Termination Event}} sitting on its conscience. It will ask for a waiver. Thanks to the [[no oral modification]] clause in Section {{isdaprov|9(b)}} — which extends to waivers — a [[NAV trigger]] waiver must be given in writing<ref>This has been recently confirmed in {{casenote|Rock Advertising Limited|MWB Business Exchange Centres Limited.</ref>. This then leads to an argument between [[legal]] and the [[credit department]] as to whose job it is to send out this waiver. | |||
Legal: “You imposed the stupid [[NAV trigger]], so you can damn well send out waivers for it.” | |||
Credit: “Help! Help! It’s a legal agreement! I am not qualified to do this! I cannot opine!” | |||
You’ll never guess where the [[JC]]’s sympathies lie. | |||
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*[[Credit mitigant|Credit mitigants]] | *[[Credit mitigant|Credit mitigants]] | ||
*{{isdaprov|Additional Termination Events}} | *{{isdaprov|Additional Termination Events}} | ||
{{ref}} | |||
Revision as of 08:56, 8 August 2018
The right to terminate a master agreement as a result of the decline in net asset value of a hedge fund counterparty. Often there are three levels of trigger: Monthly; Quarterly and Annually, and you may find yourself embraced in a tedious argument about whether this should be “rolling” (that is, judged for the period from any day) or “point-to-point” - judged from a defined day to the end of the period following that day.
In practice an official NAV is only “cut” once for every “liquidity period”, and it is hard to see how a credit officer, however enthusiastic, could define an effective Net Asst Value as at any other time. On the other hand, credit officers don’t usually monitor NAV triggers anyway, so what do they care?
All rather tiresome, and quite unnecessary if you have the right, as most prime brokers do, to jack up initial margin at your discretion[1].
Even though generally they’re not actively monitored, NAV triggers lead to the tedious cottage industry of waiving breaches of the NAV trigger. This is because while a prime broker’s credit department doesn't have the bandwidth to be monitoring thousands of NAV triggers, the hdge fund who has granted them will, and if it does suffer a significant drawdown, it won’t like an unexploded Additional Termination Event sitting on its conscience. It will ask for a waiver. Thanks to the no oral modification clause in Section 9(b) — which extends to waivers — a NAV trigger waiver must be given in writing[2]. This then leads to an argument between legal and the credit department as to whose job it is to send out this waiver.
Legal: “You imposed the stupid NAV trigger, so you can damn well send out waivers for it.” Credit: “Help! Help! It’s a legal agreement! I am not qualified to do this! I cannot opine!”
You’ll never guess where the JC’s sympathies lie.
See also
References
- ↑ I know, I know, there may be a margin lockup.
- ↑ This has been recently confirmed in {{casenote|Rock Advertising Limited|MWB Business Exchange Centres Limited.