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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. | ||
===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. | |||
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