Turbulent times: Dealing with margin calls and minimising your risk

The markets are set to remain volatile for the short to medium term given the developments with COVID19 internationally. You will need to make margin calls and there will be significant pressure during these turbulent times. We have outlined some of the key risks below to give you strategies to mitigate your risks:

• Time is of the essence: value of collateral may be declining rapidly and a lender may only want to give a borrower limited time to meet a margin call before taking further steps.
• Act in haste, repent at leisure: when acting quickly, things often go wrong. Are teams aware of the process they should be following for communicating with the borrower; checking contractual rights; recording decisions that are being made; following contractual formalities?
• Follow the contract: eg if notice is required in writing, not sufficient for RM to make margin call by telephone.
• Stick to timescales: eg do not take steps to liquidate until time to meet margin call has passed (either as notified or prescribed by contract).
• Acting reasonably: any requirement to act reasonably or in good faith may depend on local law, but whatever law applies, generally prudent to document reasons for acting quickly (eg market conditions; borrower’s financial situation).
• Negotiating with borrower: be clear who internally is negotiating with borrower to avoid conflicting messages; any negotiations to be without prejudice to/no waiver of formal rights (avoid oral agreements to extend call etc); and check whether local law imposes additional obligations on dealings with borrower.
• Wider obligations: depending on the nature of the borrower, consider application of any unfair terms and consumer protection legislation and compliance with any regulatory obligations (eg treating customers fairly).

If you would like to discuss your strategies or any specific issues, please contact Joanna Pearson, Caroline Hunter-Yeats, Andrew Williams, Penny Miller or your usual contact and we would be happy to provide ad-hoc advice on mitigating your risks.