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Also, the [[mark-to-market]] exposure on [[swap]] {{isdaprov|transaction}} is a wildly volatile thing: With a [[loan]], less so: you know you have (a) principal, (b) accrued [[interest]] and (c) [[break costs]] — the last of which might be significant for a long term [[fixed rate]] [[loan]]<ref>But are there such things in this day and age? Serious question.</ref>, but generally will pale in comparison to the principal sum owed. | Also, the [[mark-to-market]] exposure on [[swap]] {{isdaprov|transaction}} is a wildly volatile thing: With a [[loan]], less so: you know you have (a) principal, (b) accrued [[interest]] and (c) [[break costs]] — the last of which might be significant for a long term [[fixed rate]] [[loan]]<ref>But are there such things in this day and age? Serious question.</ref>, but generally will pale in comparison to the principal sum owed. | ||
So a swap counterparty who terminates might be [[out of the money]], and disinclined to terminate just now, hoping that a more benign market environment might be just around the corner to dig it out of its hole so that when it does pull its trigger, the {{isdaprov|Close-Out Amount}} will be favourable. This is still taking quite the market punt on a bust counterparty — by means of a [[European Option - Equity Derivatives Provision|European option]]<ref>A correspondent writes pointing out — quite correctly — that, once an {{isdaprov|Event of Default}} has happened, the option to send a 6(a) Notice is | So a swap counterparty who terminates might be [[out of the money]], and disinclined to terminate just now, hoping that a more benign market environment might be just around the corner to dig it out of its hole so that when it does pull its trigger, the {{isdaprov|Close-Out Amount}} will be favourable. This is still taking quite the market punt on a bust counterparty — by means of a [[European Option - Equity Derivatives Provision|European option]]<ref>A correspondent writes pointing out — quite correctly — that, once an {{isdaprov|Event of Default}} has happened, the option to send a {{isdaprov|6(a)}} Notice is [[American option|''American'']]. So it is — thanks to Section {{isdaprov|2(a)(iii)}}, a potentially open ended one — until you convert it into something ''like'' a [[European option]] by sending the notice and specifying a date in the future on which it takes place.</ref> — of course, and not the sort of thing a prudent risk manager would do<ref>The silly [[FT book about derivatives|FT book]] is right about this, to be fair.</ref>, but I don’t suppose banking folk can be expected to have understood this in 1986. | ||
Actually, even ''that'' makes little sense, since such a counterparty wouldn't be obliged to close out at all, but could just suspend its obligations under Section {{isdaprov|2(a)(iii)}} - something which it can (or could, at any rate, when the 20 day notice period was devised, in 1987) do indefinitely. | Actually, even ''that'' makes little sense, since such a counterparty wouldn't be obliged to close out at all, but could just suspend its obligations under Section {{isdaprov|2(a)(iii)}} - something which it can (or could, at any rate, when the 20 day notice period was devised, in 1987) do indefinitely. | ||
So we get back to an alternative, more [[tedious]] explanation. It is pure [[flannel]]. | So we get back to an alternative, more [[tedious]] explanation. It is pure [[flannel]]. | ||