New York-based documentation risk management firm docGenix has launched a new product to help market participants monitor the status of net asset value (NAV) triggers, potentially allowing them to better deal with breaches or near-misses in the future.
NAV triggers are typically included in a wide range of financial contracts, including trading agreements between hedge funds and prime brokers, for instance. As markets fluctuated during the recent crisis, many firms came close to hitting them, creating operational headaches for some market participants.
The triggers differ greatly from contract to contract and are also complex. This makes them tricky to keep tabs on, leaving firms scrambling to assess the implications of breaching a trigger. "We've looked at hundreds of NAV triggers and they are really quite varied and complex. The drafting often differs only subtly, but in important ways. That makes them difficult to manage," says John Berry, general counsel at docGenix, which was founded by law firm Allen & Overy in April 2008.
Called NAVigator, the new product works in conjunction with the firm's inSight data service. The inSight facility automatically converts derivatives agreements into Extensible Markup Language, creating a searchable document and encoding important data points. This data can then be used to feed a variety of other risk management systems, such as those for collateral and margining.
NAV triggers are really quite varied and certainly quite complex. The drafting often differs only subtly, but in important ways. That makes them difficult to manage
Although the full inSight service is designed for derivatives contracts only, NAVigator works for critical performance triggers in any type of financial contract, according to docGenix. The product allows users to get detailed information on their proximity to various NAV triggers embedded in contracts in real time. It also allows them to enter historical or hypothetical numbers to stress-test their NAV triggers.
In either case, the service will inform users of how close they are to hitting NAV triggers and what the potential consequences would be - for instance, a right to termination or a need to deliver collateral.
Although the product is being targeted at fund managers, NAVigator may prove a useful tool for sell-side counterparties as well, says Dan Mudge, chief executive of docGenix in New York.