Margin lock-up

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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 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 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.