NAV trigger

The right to terminate a master agreement as a result of the decline in net asset value of a hedge fund counterparty (other counterparty types generally won't have a “net asset value” to trigger).

Often there are three levels of trigger: Monthly; Quarterly and Annually. You may find yourself embraced in a tedious argument about whether these should be “rolling” (that is, judged for the period from any day) or “point-to-point” (that is, 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 determine what the net asset value was 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.

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. 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

• Credit mitigants
• Additional Termination Events