The COVID-19 pandemic has created unprecedented volatility and market stress across all asset classes. This, in turn, is being reflected in increased margin requirements, freezing up of government debt markets, difficulty in managing collateral and liquidity requirements, and significant investor losses. Together, these present an immense challenge to buy-side market participants.
Investment funds of all types will need to prepare for a number of financial and legal tests in the weeks and months ahead. Accordingly, the following are certain proactive steps that investment managers should consider undertaking promptly with respect to their trading arrangements and contracts:
- Understand their NAV triggers and the formal requirements and consequences of actual or potential breaches
- These may also be included in repo, PB and FCM arrangements, as well as securities lending agreements
- Assess exposure calculations and collateral and margin delivery terms
- Determine how to manage hedge positions in tightening market
- Evaluate whether there is access to additional liquidity (including via repo and TRS facilities)
- Assess the implications of force majeure and material adverse change clauses in trading agreements
- Review how default and termination provisions operate under their trading agreements
In addition to the foregoing, it is strongly recommended that you proactively engage in an open dialogue with your counterparties.
Seward & Kissel has established a COVID-19 Resource Center on our web site to access all relevant alerts that we distribute.