Template:M summ 2002 ISDA 5(a)(vi): Difference between revisions

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(Created page with "''Want to quickly convert {{isdaprov|Cross Default}} to {{isdaprov|Cross Acceleration}}? Click '''here'''.''<br> ===General=== {{isdapr...")
 
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''Want to quickly convert {{isdaprov|Cross Default}} to {{isdaprov|Cross Acceleration}}? Click '''[[Cross Acceleration - ISDA Provision|here]]'''.''<br>
===General===
===General===
{{isdaprov|Cross Default}} is intended to cover off the unique risks associated with ''lending money to counterparties who have also borrowed heavily from other people''. If you try to apply it to contractual relationships which aren't debtor/creditor in nature — as starry-eyed young [[credit officer]]s in the thrall of the moment like to — it will give cause trouble. This will not stop credit officers doing that. Note also that it is, as are most ISDA provisions, bilateral. If you are a regulated financial institution, the boon of having a {{isdaprov|Cross Default}} right against your counterparty may be a lot smaller than the bane of having given away a {{isdaprov|Cross Default}} right against yourself.  
{{isdaprov|Cross Default}} is intended to cover off the unique risks associated with ''lending money to counterparties who have also borrowed heavily from other people''. If you try to apply it to contractual relationships which aren't debtor/creditor in nature — as starry-eyed young [[credit officer]]s in the thrall of the moment like to — it will give cause trouble. This will not stop credit officers doing that. Note also that it is, as are most ISDA provisions, bilateral. If you are a regulated financial institution, the boon of having a {{isdaprov|Cross Default}} right against your counterparty may be a lot smaller than the bane of having given away a {{isdaprov|Cross Default}} right against yourself.  
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*a default under a financial agreement that would allow a creditor to [[accelerate]] any [[indebtedness]] that party owes it;  
*a default under a financial agreement that would allow a creditor to [[accelerate]] any [[indebtedness]] that party owes it;  
*a [[failure to pay]] on the due date under such agreements after the expiry of a [[grace period]].
*a [[failure to pay]] on the due date under such agreements after the expiry of a [[grace period]].
{{DUST and Cross Default Comparison}}
===The difference between the two formulations===
[[File:Crossing Threshold Hope.jpg|thumb|left|About as much use as a cross default clause]]
====Measure of the Threshold====
*'''{{1992ma}}''': This contemplates default “in an aggregate '''amount'''” exceeding the {{isdaprov|Threshold Amount}} which would justify early termination of the {{isdaprov|Specified Indebtedness}}: that is to say the value of the failed payment, and not the whole principal amount of the {{isdaprov|Specified Indebtedness}} it was owed under, contributes to the {{isdaprov|Threshold Amount}}, ;
*'''{{2002ma}}''': This contemplates an [[event of default]] under agreements whose “'''aggregate principal amount'''” is greater than the Threshold Amount: that is to say it is the ''whole principal amount'' of the agreement which is picked up, not just the amount of the payment.
This change, we speculate, is meant to fix a howler of a drafting lapse from {{icds}}:
*It can be triggered by any [[event of default]], not just a payment default (i.e. the {{1992ma}} requirement for "an {{isdaprov|Event of Default}} ... ''in an amount equal to...''” impliedly limits the clause to ''payment'' defaults only since other defaults aren't “"in an amount"”...);
*It captures the whole value of the {{isdaprov|Specified Indebtedness}}, not just the value of the default (if it even ''is'' a payment capable of being valued) itself.
For example: if you defaulted on a small interest payment on your {{isdaprov|Specified Indebtedness}} which made your whole loan repayable, under the {{1992ma}} you could only count the value of that missed interest payment to your {{isdaprov|Threshold Amount}}. But the whole loan is at risk of being accelerated — so this is a  much more significant credit deterioration than is implied by the missed payment.
It is innocuous, that is, unless you are cavalier enough to include ''derivatives or other payments which are not debt-like'' in your {{isdaprov|Specified Indebtedness}}. But if you do that, you've bought yourself a wild old ride anyway.
Don't say you weren't warned.
{{sa}}
*[[Cross acceleration]]
{{ref}}