This post is the second in a series that we are preparing in response to questions from clients, colleagues, and contacts.  Yesterday’s post, which addressed interest rate swaps in a zero or negative interest rate environment, is available here.

In today’s post, we address considerations related to Decline in Net Asset Value (NAV) provisions in agreements that govern the trading of over-the-counter (OTC) derivatives and other financial contracts. 

As we explore in greater detail, the recent volatility across financial markets makes it more important than ever for investment managers and their clients to understand – and focus on – these fairly common contractual provisions.


Continue Reading Master Agreements and Volatile Markets: Decline in Net Asset Value Provisions

I. DERIVATIVES ISSUES

1. Inventory “relationship level” considerations in legal documentation that governs your derivatives trading relationships (ISDA Master Agreements, Futures Customer Agreements, Master Securities Forward Transaction Agreements, etc.)

a. Example: Decline in Net Asset Value Provisions (Common in ISDAs)

i. Identify the trigger decline levels and time frames at which transactions under the agreement can be terminated (25% over a 1-month period – is that measured on a rolling basis or by reference to the prior month’s end?)

ii. Confirm whether all or only some transactions can be terminated (typically, it is all transactions)

iii. Identify the notice requirements that apply when a threshold is crossed

iv. Identify whether the agreement includes a “fish or cut bait clause” that restricts the ability of the other party to designate the termination of the transactions under the trading agreement


Continue Reading Market Volatility Regulatory Outline for Asset Managers

This post will address a question that we have been receiving from many contacts, clients and colleagues in recent days (particularly in light of the rate cut announced yesterday afternoon by the Federal Reserve Board).

  • What will happen to an interest rate swap in a zero or negative interest rate environment?

We first addressed this question in a May 2015 post entitled, Dealing with “Deemed Zero Rates” in Loan Agreements and Related Interest Rate Swap Documentation.


Continue Reading Interest Rate Swaps in “Zero” and Negative Interest Rate Environments