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Black Swan Alert: Closure of Philippines Stock Exchange and Record Low Base Rates - Impact on Hedging and Financing Documents

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This week, there were two major Black Swan events linked to the ongoing COVID-19 outbreak.

On 17 March 2020, as part of Philippines’ COVID-19 containment measures, President Rodrigo Duterte announced the unprecedented indefinite closure of the Philippines Stock Exchange. Trading resumed under intense pressure on 19 March 2020 with Philippine listed stocks losing almost 25% at opening. 

Two days later, on 19 March 2020, the Bank of England cut its base rate to a historic record low of 0.1%, as part of its strategy to manage and mitigate the economic and financial impact of COVID-19. Other Central Banks took similar actions.

These events may have a significant impact on your hedging and financing arrangements. Counterparties should review the terms of their hedging documents and their financing documents in order the assess their positions. Things to consider include:

  • Increased risk of valuation disputes
  • Increased risk of settlement disputes
  • Increased risk of breaching financial covenants and related remedy rights
  • Whether there is an allowance in financial covenant levels that might accommodate variations in financial performance
  • Whether spikes in mark-to-market valuations of hedging positions could trigger breaches
  • Your ability to meet any collateral support obligations
  • Whether there is a ‘zero floor’ that applies in circumstances where the base rate would otherwise be zero
  • Whether any amendments need to be negotiated

Please do not hesitate to contact any of us if you would like to discuss further.