MARGIN CALLS – HOW CAN INVESTORS PROTECT THEIR POSITION?

Following the recent market shakedown amidst the Covid-19 pandemic, banks have been issuing margin calls to their counterparties.

Who is affected? Broadly speaking, two types of investors: The first category are wealthy clients who have been investing in stock markets on a leveraged basis, through so-called Lombard loans, which are secured against a portfolio of liquid assets like equities and bonds. The other category comprises counterparties who have entered into derivatives transactions or secured lending agreements with banks.

In simple terms, a margin call is the demand by the bank to increase the collateral or to reduce the credit exposure of the bank by repaying a part of the loan.

In times that are already challenging enough, the margin calls have caught many investors off-guard. Banks typically allow not more than two days to top up the collateral. This often requires affected investors to source substantial liquidity amounts to meet the bank’s request, which can prove difficult in the context of a general market sell-off.

The present contribution provides a brief overview of the legal framework and main issues arising under Swiss law, including the rights and remedies available to affected parties.

Full article available here.

Contact the authors:
Matthias Gstoehl
Simone Nadelhofer
Nicolas Ollivier