82,976
edits
Template:Flawed asset capsule: Difference between revisions
no edit summary
Amwelladmin (talk | contribs) (Created page with "Following an event of default, a “flawed asset” provision allows an innocent, but out-of-the-money counterparty to a {{tag|derivative}} or {{tag|securities fin...") |
Amwelladmin (talk | contribs) No edit summary |
||
| Line 5: | Line 5: | ||
The most famous flawed asset clause is Section {{isdaprov|2(a)(iii)}} of the {{isdama}}. It entered the argot in a simpler, more peaceable time, when two-way, zero-threshold, daily margined {{tag|CSA}}s were a rather fantastical sight, and it was reasonably likely that a counterparty might be nursing a large unfunded mark-to-market liability which it would not want to have to fund just because the clot at the other end of the contract had gone belly-up. Closing out the contract would crystallise that liability, so the flawed asset provision allowed that innocent fellow to just stop performing hte contract altogether, rather than paying out its mark-to-market loss. | The most famous flawed asset clause is Section {{isdaprov|2(a)(iii)}} of the {{isdama}}. It entered the argot in a simpler, more peaceable time, when two-way, zero-threshold, daily margined {{tag|CSA}}s were a rather fantastical sight, and it was reasonably likely that a counterparty might be nursing a large unfunded mark-to-market liability which it would not want to have to fund just because the clot at the other end of the contract had gone belly-up. Closing out the contract would crystallise that liability, so the flawed asset provision allowed that innocent fellow to just stop performing hte contract altogether, rather than paying out its mark-to-market loss. | ||
That was then; 1987; they hadn’t even invented the {{ | That was then; 1987; they hadn’t even invented the {{csa}}. Even once they had, it would be common for a muscular [[broker/dealer]]s to insist on one-way margining: “You, no-name pipsqueak highly levered [[hedge fund]] type, are paying ''me'' variation margin; I, highly-capitalised, prudentially regulated<s>, balance-sheet levered</s> financial institution, am not paying ''you''.” | ||
Well, those days are gone, and bilateral zero-threshold margin arrangements are more or less obligatory nowadays, so it’s hard to see the justification for a [[flawed asset]] provision. But we still have one, and modish post-crisis threats by regulators worldwide to stamp them out seem, for the time being, to have come to nought. | Well, those days are gone, and bilateral zero-threshold margin arrangements are more or less obligatory nowadays, so it’s hard to see the justification for a [[flawed asset]] provision. But we still have one, and modish post-crisis threats by regulators worldwide to stamp them out seem, for the time being, to have come to nought. | ||