Trading Agreements and NAV Termination Triggers ... - Fried Frank

ConclusionHedge funds aiming to protect trading liquidity need to pay careful attention to NAV triggers intheir trading agreements with dealers. Whether dealer remedies include trade termination rightsor additional collateral calls, NAV trigger breaches can have a severe impact on fund liquidity.Broad cross default clauses may allow the NAV trigger breaches to be imported across tradingrelationships. Such events may also need to be disclosed to investors.Given the seriousness of the potential consequences, it is imperative that hedge funds develop arobust approach including careful attention to drafting, close monitoring of NAV triggers andprompt resolution of any breaches through the use of waivers, resets and amendments. It isparticularly important to address these issues in the current environment of market volatility andinvestor unease.Mr. Mitchell, Mr. Thum, Mr. Cutler and Mr. Ugarte are attorneys in the Asset Management Groupof Fried, Frank, Harris, Shriver & Jacobson LLP. Mr. Mitchell is a Partner resident in the NewYork, NY office and Mr. Thum is Senior Derivatives Advisor resident in the New York, NY office.Mr. Cutler and Mr. Ugarte are both Associates in the Washington, DC office. This article reflectsthe views of the authors, and does not constitute legal advice. Mr. Mitchell can be reached atdavid.mitchell@friedfrank.com, Mr Thum can be reached at william.thum@friedfrank.com, Mr.Cutler can be reached at aaron.cutler@friedfrank.com, and Mr. Ugarte can be reached ateduardo.ugarte@friedfrank.com.1 We refer to NAV triggers to include both NAV triggers and NAV floors collectively, unless we noteotherwise.2 In Part 4 of the Schedule to both the 1992 and 2002 version of the ISDA Master Agreement, partiesgenerally specify the requirement for a fund to provide a statement of the fund’s month-end NAV levelwithin a specified period following such month end. The length of the period depends on the outcome ofthe parties’ negotiation.© 2009 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P in the Vol. 2, No. 4edition of the Bloomberg Law Reports - Risk & Compliance. Reprinted with permission. The views expressed herein arethose of the authors and do not represent those of Bloomberg Finance L.P. Bloomberg Law Reports (R) is a registeredtrademark and service mark of Bloomberg Finance L.P