Margin lock-up: Difference between revisions
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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. | ||
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Revision as of 10:40, 17 May 2019
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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 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.