In March 2020, we published a post entitled Master Agreements and Volatile Markets: Decline in Net Asset Value Provisions.

We believe that the March 2020 post is particularly relevant in light of the cascading nature of stock market declines over the past year, and on-going market commentary and debates about the likelihood and extent of a recession. Regardless of the ultimate outcome of these debates, increased market volatility presents buy-side firms with the opportunity to re-familiarize themselves with the key terms and conditions of their derivatives trading documentation, including decline in net asset value (“NAV”) provisions.

In short, everything that we mentioned about decline in NAV provisions in March 2020 continues to be true today, although we are taking this opportunity to supplement the March 2020 post with the following considerations:

• In addition to inventorying the terms of decline in NAV provisions, we recommend that investment managers review and analyze their trading agreements for provisions that may effectively import a close-out event from one trading agreement into another (or even every other) trading agreement.
• For example, it is possible that a Master Securities Forward Trading Agreement (“MSFTA“) with a broker-dealer (“Party A“) may include a provision that could result in the early termination of all transactions under that MSFTA if a default or early termination occurs under any other trading agreement with Party A or any of its affiliates.
• So, by way of further example, the forward transactions under the MSFTA could be subject to early termination by Party A, if a Decline in NAV event with respect to the investment manager’s client is triggered under an ISDA Master Agreement with an affiliate of Party A.

The March 2020 article is available here.

Good day. Good, as we mentioned in March 2020, to be especially mindful of “the basics”. DR2