Lesson 20 of 25 · 8 min

Discretion language, and what it does not quantify

A reserved right names a power without a size, a date, or a probability attached to it.

Discretion language is a reserved right written without a magnitude. It names a power — to demand repayment, to revise an advance rate, to sell pledged holdings, to act without notice — and it does not attach a size, a date, or a frequency to the exercise of that power. The statement is almost silent on these rights. The product line's word “demand” is the one leak. The clauses themselves live in the agreement.

What the March page does quantify is the last exercise, not the reserved one. Calder is counted at 35% this period. Meridian is counted at 50%. Those are applied outcomes. Whether 35% is the schedule rate, a concentration haircut, or a revised rate is not a number on the page. A later revision that took Calder from 35% to 25% would be a $184,000.50 reduction in lending value — $1,840,005.00 × 0.10 — and nothing about that $184,000.50 is implied by the present 35%. The present 35% is a fact about March. Discretion is a fact about what March does not constrain.

What a reserved right specifically does not tell you:

Size — how many points an advance rate may move, or how much of the $1,858,563.47 may be demanded.
Date — whether a demand or a regrade arrives in a quiet week or on a 12 March reset day.
Probability — how often the right is used. A right that is rarely used is still a right.
Selection — which of the five rows would be sold, and in what order, if a sale right were used.

The statement's completeness on arithmetic can hide this incompleteness on rights. Two legs, a blended 54.32%, a 30.81% LTV, a $552,780.00 undrawn line: the page is full of quantities. None of those quantities is a forecast of a discretionary act. Reading them as if they were — as if a 55.99% headroom were a promise that no regrade will occur inside that fall — treats a reserved right as a scheduled one. The language does not schedule it.

Key terms

Discretion language: Contract wording that reserves a power without stating when, by how much, or how often it will be used.
Reserved right: A power the lender holds from the outset — demand, regrade, sale, no-notice action — independent of any printed March figure.
Applied outcome: What the statement shows was used this period, such as Calder's 35%. It is not a cap on the next period's assignment.

Worked example

A 10-point invented regrade, which the page cannot rule out

Calder Growth common at the 31 March mark, then an invented 10-point reduction in its advance rate, other rows unchanged.

Calder market value, unchanged: $1,840,005.00
Lending value at the printed 35%: $644,001.75
Lending value at an invented 25%: $1,840,005.00 × 0.25 = $460,001.25
Lending value removed by that regrade: $644,001.75 − $460,001.25 = $184,000.50
New book lending value: $3,277,251.25 − $184,000.50 = $3,093,250.75
What the March statement says about the probability of this: Nothing

The $184,000.50 is a size a reserved right could produce. The page that printed 35% does not bound that size, date it, or give it a chance.

Check yourself

The March statement prints Calder at 35% and a closing LTV of 30.81% against a 70% market-value threshold. What do those two figures not tell you about a later revision of Calder's advance rate?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.