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Template:M gen 2018 CSD 13(h): Difference between revisions
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===The logic=== | |||
There is some debate even as to the logical structure of the clause. We discovered this because we read it one way, whereas a correspondent who saw action in {{icds}} during its gestation read it another way. | |||
Initially, we read the logic as follows: | |||
{{imcsdprov|SPRE}} means (i) ''unless'' {{imcsdprov|FPETA}} applies, in which case it means (ii), ''unless'' {{imcsdprov|CACSPRE}} applies, in which case it means {{imcsdprov|CASPRE}}. | |||
The alternative reading is: | |||
{{imcsdprov|SPRE}} means (for EODs and ACs) (i), and (for ETAs that came about for any other reason) (ii) ''unless'' {{imcsdprov|CACSPRE}} applies, in which case it means {{imcsdprov|CASPRE}}. | |||
With profound regret, we find ourselves agreeing with the latter logic, notwithstanding the absurd outcome it generates, and despite the desperate drafting in which it is wrought. | |||
===[[Secured Party Rights Event - IM CSD Provision|The]] alternatives=== | ===[[Secured Party Rights Event - IM CSD Provision|The]] alternatives=== | ||
====As-standard: a “designated Early Termination Date”==== | ====As-standard: a “designated Early Termination Date”==== | ||
The as-standard Secured Party Rights Event in the {{imcsd}} is the designation of an {{isdaprov|Early Termination Date}} in respect of all {{isdaprov|Transaction}}s following an {{isdaprov|Event of Default}} but — unless designated as an “{{imcsdprov|Access Condition}}” — not a ''normal'' {{isdaprov|Termination Event}} or an [[Additional Termination Event - ISDA Provision|''Additional'' Termination Event]]. For what it is worth, | The as-standard Secured Party Rights Event in the {{imcsd}} is the designation of an {{isdaprov|Early Termination Date}} in respect of all {{isdaprov|Transaction}}s following an {{isdaprov|Event of Default}} but — unless designated as an “{{imcsdprov|Access Condition}}” — not a ''normal'' {{isdaprov|Termination Event}} or an [[Additional Termination Event - ISDA Provision|''Additional'' Termination Event]]. For what it is worth, “{{imcsdprov|Access Condition}}s” are a list of {{imcsdprov|Termination Event}}s and {{imcsdprov|Additional Termination Event}}s set out in Paragraph {{imcsdprov|13(e)(ii)}} for each of which one can opt — separately for each party — in your elections. What on earth {{icds}} thought it was achieving with such pointless, fine-grained optionality (other than a sumptuous lifestyle for the hoardes of [[legal eagle]]s who will feast on client negotiations as a result) it is hard to say. In any case, now we have a subset of termination rights that allow an {{isdaprov|Innocent Party}} to immediately seize the other party’s {{imcsdprov|Posted Credit Support (IM)}} at the moment of notifying close-out, and days, weeks or months before it knows whether it is actually owed anything. | ||
This leaves those means of terminating of one or more {{isdaprov|Transaction}}s that are ''not'' {{isdaprov|Events of Default}} or “{{imcsdprov|Access Condition}}s”. For these you must wait until you have determined and demanded an {{isdaprov|Early Termination Amount}}, and the client has failed to pay it when due, that failure itself representing a further {{isdaprov|Event of Default}} (putting you somewhat back in the position of (i), but okay let’s gloss over that. | |||
In any case, just as a piece of design this is cruddy: ''any'' event leading to the early termination of all outstanding {{isdaprov|Transaction}}s, should count as a {{imcsdprov|Secured Party Rights Event}}, since at that point you are off risk, right? | In any case, just as a piece of design this is cruddy: ''any'' event leading to the early termination of all outstanding {{isdaprov|Transaction}}s, should count as a {{imcsdprov|Secured Party Rights Event}}, at the same time, since at that point you are off risk, right? {{icds}}, obsessed as ever with counterparty credit default, uses this as the distinction point for early access to the collateral, when in fact this is not what initial margin is about. For initial margin to be in play it is a given that there has been a credit failure. Initial margin is about ''market'' losses between that failure and when you finally go off risk. Until that point yuou don’t have a claim, and you don’t have [[credit risk]], since the initial margin is held with a third party. As long as amounts are undetermined, or not as yet due under those {{imcsdprov|Transaction}}s, there is nothing to appropriate the collateral ''for''. | ||
''Why do you need to appropriate [[initial margin]] before you know if you are actually owed anything? | ''Why do you need to appropriate [[initial margin]] before you know if you are actually owed anything? | ||
==== | ====The sensible point for an SPRE: “{{imcsdprov|Failure to Pay Early Termination Amount}}”==== | ||
(Quick drafting point: this means that a party fails to pay its {{isdaprov|Early Termination Amount}} once it has been determined, not that there is an {{isdaprov|Early Termination Amount}} determined following only a {{isdaprov|Failure to Pay or Deliver}} {{isdaprov|Event of Default}}.) That being the case, this is — well, if it covered all {{isdaprov|Termination Events}}, would be — the obvious best choice: it means, beyond any doubt the counterparty really has failed, it really did owe something, and it really did fail to pay it. | (Quick drafting point: this means that a party fails to pay its {{isdaprov|Early Termination Amount}} once it has been determined, not that there is an {{isdaprov|Early Termination Amount}} determined following only a {{isdaprov|Failure to Pay or Deliver}} {{isdaprov|Event of Default}}.) That being the case, this is — well, if it covered all {{isdaprov|Termination Events}}, would be — the obvious best choice: it means, beyond any doubt the counterparty really has failed, it really did owe something, and it really did fail to pay it. | ||
''Now'' you have all the justification you need to wade in and repossess your counterparty’s initial margin. | ''Now'' you have all the justification you need to wade in and repossess your counterparty’s initial margin. | ||
====Failing that: “{{imcsdprov|Control Agreement Secured Party Rights Event}}s”==== | ====Failing that: “{{imcsdprov|Control Agreement Secured Party Rights Event}}s”==== | ||
If you have chosen to designate in your Control Agreement what the Secured | If you have chosen to designate in your {{imcsdprov|Control Agreement}} what the {{imcsdprov|Secured Party}}’s rights to possess collateral are, then that applies, and overrides any of the disastrous trainwreck we have just picked through above. | ||
===Cutting through the nonsense=== | ===Cutting through the nonsense=== | ||
For those who don’t trust {{imcsdprov|Control Agreement}}s to do what they say on the tin, consider this kind of wording: | For those who don’t trust {{imcsdprov|Control Agreement}}s, or {{imcsdprov|Secured Party Rights Event}}s, to do what they say on the tin, consider this kind of wording: | ||
{{quote|“'''{{imcsdprov|Secured Party Rights Event}}'''” means that, following the occurrence or designation of an {{isdaprov|Early Termination Date}} with respect to all outstanding {{isdaprov|Transaction}}s, an {{isdaprov|Early Termination Amount}} payable by the {{imcsdprov|Chargor}} has been determined and notified to the {{imcsdprov|Chargor}} under Section {{isdaprov|6(d)}}, and the {{imcsdprov|Chargor}} has not paid it in full when due under Section {{isdaprov|6(d)(ii)}}.}} | {{quote|“'''{{imcsdprov|Secured Party Rights Event}}'''” means that, following the occurrence or designation of an {{isdaprov|Early Termination Date}} with respect to all outstanding {{isdaprov|Transaction}}s, an {{isdaprov|Early Termination Amount}} payable by the {{imcsdprov|Chargor}} has been determined and notified to the {{imcsdprov|Chargor}} under Section {{isdaprov|6(d)}}, and the {{imcsdprov|Chargor}} has not paid it in full when due under Section {{isdaprov|6(d)(ii)}}.}} | ||