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{{a|negotiation|}}The right to terminate a {{tag|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).
{{a|negotiation|}}The right to terminate a {{tag|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).


Like most [[events of default]], [[NAV trigger]]s are a second-order derivative for the only really important type of default: a [[failure to pay]]. A significant decline in [[NAV]] makes a payment default ''more likely''. [[NAV]] declines in three main ways:
Like most [[events of default]], [[NAV trigger]]s are a second-order derivative for the only really important type of default: a [[failure to pay]]. A significant decline in [[NAV]] makes a payment default ''more likely''. [[NAV]] declines in three main ways:
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[[Prime broker]]s hold [[initial margin]] to protect against the first, control the second in any weather, and one would expect the third to result in overall proportionate de-risking anyway. <ref>Not always precisely, of course: thanks to Mr. Woodford for reminding us all that a manager handling redemptions will tend to nix [[liquid]] positions first. </ref> In any case, the benefit to a second order derivative close-out right is that it might allow you to get ahead of the game. If I know the default is coming (because NAV trigger, right?) why wait until a payment is due to see if I get hosed?  
[[Prime broker]]s hold [[initial margin]] to protect against the first, control the second in any weather, and one would expect the third to result in overall proportionate de-risking anyway. <ref>Not always precisely, of course: thanks to Mr. Woodford for reminding us all that a manager handling redemptions will tend to nix [[liquid]] positions first. </ref> In any case, the benefit to a second order derivative close-out right is that it might allow you to get ahead of the game. If I know the default is coming (because NAV trigger, right?) why wait until a payment is due to see if I get hosed?  


Because, in this age of high-frequency trading, multiple payments are due every day, and even if one isn't, in many cases you can force one by raising initial margin]]<ref>Assuming you have undercooked your IM calculations in the first place, that is. [[IM]] is designed to tide you over between payment periods after all. </ref>. All told, an ''actual'' failure to pay is deterministic. There is no argument. A NAV trigger breach - not so much.  
Because, in this age of high-frequency trading, multiple payments are due every day, and even if one isn't, in many cases you can force one by raising [[initial margin]]<ref>Assuming you have undercooked your IM calculations in the first place, that is. [[IM]] is designed to tide you over between payment periods after all. </ref>. All told, an ''actual'' failure to pay is deterministic. There is no argument. A NAV trigger breach - not so much.  


Especially since an official [[NAV]] is only “cut” once for every “[[liquidity period]]” - monthly or quarterly in most cases - 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 officer]]s don’t usually monitor NAV triggers anyway, so what do they care?
Especially since an official [[NAV]] is only “cut” once for every “[[liquidity period]]” - monthly or quarterly in most cases - 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 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, 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>.
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]]. That’s really the best place for the NAV trigger, as you may agree if you read on.</ref>.
 
===Types of NAV 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).
 
===The exhilarating process of waiving a NAV trigger breach===
Even though [[NAV trigger|NAV triggers]] aren’t usually monitored, they can lead to the tedious cottage industry of [[waiver|waiving]] their breach. This is because while a [[prime broker]]’s [[credit department]] won’t have the inclination (or bandwidth) to monitor the thousands of NAV triggers it has buried in its contract portfolio, each [[hedge fund]] who has granted one will and, if<ref>''When''.</ref> it suffers a significant drawdown, won’t like an unexploded {{isdaprov|Additional Termination Event}} sitting on its conscience. So, it will ask for a [[waiver]]. If it has clever lawyers, it will explain that it has heightened [[cross default]] risk as a result. It may insist on one, even though you would think it ought to be in no position to be insisting anything.  


Even though generally they’re not actively monitored, [[NAV trigger|NAV triggers]] lead to the tedious cottage industry of [[waiver|waiving]] their breach. This is because while a [[prime broker]]’s credit risk department won’t have the inclination (or bandwidth) to monitoring the thousands of NAV triggers it has buried in its corpus of legal documentation, each [[hedge fund]] who has granted one will and, if<ref>''When''.</ref> it suffers a significant drawdown, won’t like an unexploded {{isdaprov|Additional Termination Event}} sitting on its conscience.It will ask for a waiver. If it has clever lawyers, it will explain that it has heightened [[cross default]] risk as a result. It may insist on one, even though you would think it ought to be in no position to be insisting anything.
No no-one likes to give a free waiver. Why would you?


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.
Yet, thanks to the [[no oral modification]] clause in Section {{isdaprov|9(b)}} — which extends to waivers — you ''must'' waive a [[NAV trigger]] 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 [[credit ]] as to ’whose job it is to send out this waiver. Honestly, this is such fun.


'''[[Legal]]''': “You imposed the stupid [[NAV trigger]], so you can damn well send out waivers for it.”
'''[[Legal]]''': “You imposed the stupid [[NAV trigger]], so you can damn well send out waivers for it.”
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You’ll never guess where the [[JC]]’s sympathies lie.
You’ll never guess where the [[JC]]’s sympathies lie.


===Practical solution===
===So, put the NAV trigger in a margin lockup===
Presuming you have reserved the right, as any sensible [[prime broker]] will, to increase your [[initial margin]] at any time, there is a way out of this, which ought to work perfectly well, but which your [[credit department]] will not like. That is to relegate the [[NAV trigger]]s to any [[margin lockup]] you have agreed.  
Presuming you have reserved the right, as any sensible [[prime broker]] will, to increase [[initial margin]] at any time, there is a way out of this. It ought to work perfectly well, though [[credit]] won’t like it: ''put [[NAV trigger]]s in the [[margin lockup]] and not the master agreement.  


This means the [[NAV trigger]] is no longer, of itself, a {{isdaprov|Termination Event}} under the {{isdama}}. All it entitles you to do is raise [[initial margin]]. Calling for more IM will achieve one of two things:
This means the [[NAV trigger]] is no longer, of itself, a {{isdaprov|Termination Event}} under the {{isdama}}. All it entitles you to do is raise [[initial margin]]. Calling for more IM will achieve one of two things:
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Thus, it doesn’t trouble fastidious types who fuss about [[cross default]] or [[DUST]], and the consequences of the trigger are in any case less apocalyptic for the fund, and less demanding of a waiver.  
Thus, it doesn’t trouble fastidious types who fuss about [[cross default]] or [[DUST]], and the consequences of the trigger are in any case less apocalyptic for the fund, and less demanding of a waiver.  


“But I don’t want to have a [[margin lockup]] just so I can have my [[NAV trigger]]”, your credit will wail. Sigh.
“But I don’t want to have a [[margin lockup]] just so I can have my [[NAV trigger]]”, your credit will wail.  
 
Sigh.


{{Seealso}}
{{Seealso}}
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