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NAV trigger: Difference between revisions
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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 | 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]]” | 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]] of the fund was at any other time, not having knowledge of those positions held with other counterparties. 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 | All rather tiresome, and quite unnecessary if you have the right, as most [[prime broker]]s do, to hike 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 come to agree if you read on.</ref>. | ||
===Types of NAV trigger=== | ===Types of [[NAV trigger]]=== | ||
Often there are three levels of trigger: '''Monthly'''; '''Quarterly''' and '''Annually'''. You may find yourself | Often there are three levels of trigger: '''Monthly'''; '''Quarterly''' and '''Annually'''. You may find yourself in a tedious argument about whether these should be “rolling” (that is, judged for the period from any day, even one on which there wasn’t an official NAV) or “point-to-point” (that is, judged between NAV calculation periods — more observable, but also a but arbitrary, as ). | ||
===The exhilarating process of waiving a NAV trigger breach=== | ===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 [[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. | ||
No no-one likes to give a free waiver. Why would you? | {{maxim|No no-one likes to give a free waiver}}. Why would you? | ||
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 | 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.” <br> | ||
'''[[Credit]]''': “Help! Help! It’s a legal agreement! I am not qualified to do this! I cannot opine!”<br> | |||
'''[[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. | You’ll never guess where the [[JC]]’s sympathies lie. | ||
===So, put the NAV trigger in a margin lockup=== | ===So, put the NAV trigger in a [[margin lockup]]=== | ||
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. | 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. | ||
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Sigh. | Sigh. | ||
{{ | {{sa}} | ||
*[[NAV]] | *[[NAV]] | ||
*[[NAV per share]] | *[[NAV per share]] | ||