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Amwelladmin (talk | contribs) (Created page with "So, to close out following a {{{{{1}}}|Bankruptcy}}, you will need: === 1. There must be a {{{{{1}}}|Bankruptcy}} under Section {{{{{1}}}|5(a)(vii)}} === There are nine differ...") |
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=== TL;DR === | |||
=== | Here are all the stages you must go through between becoming entitled to terminate and settlement for a {{{{{1}}}|Failure to Pay or Deliver}}. Note something very important: | ||
Because you have been exchanging [[VM]], as of the {{{{{1}}}|Early Termination Date}}, the [[MTM]] of the collateralised portfolio of {{{{{1}}}|Transaction}}s should be more or less '''zero'''. A [[doughnut]]. Therefore, the final gain or loss that is secured by {{imcsdprov|Posted Credit Support (IM)}} is a function of the change in portfolio value between the {{isdaprov|Early Termination Date}} and when you work out the {{isdaprov|Early Termination Amount}}. | |||
That is to say, ''you will not know who is owed money until you have worked out the {{{{{1}}}|Early Termination Amount}}''. For people who want to enforce on {{imcsdprov|Posted Credit Support (IM)}} the moment there is an Event of Default, please consider this. You do not need to enforce security yet. You might not actually be owed anything. | |||
Okay, so here goes with the timeline: | |||
*T: There must be a {{{{{1}}}|Bankruptcy}} {{{{{1}}}|Event of Default}} on a day, T. | *T: There must be a {{{{{1}}}|Bankruptcy}} {{{{{1}}}|Event of Default}} on a day, T. | ||
*T: You must send a Section {{{{{1}}}|6(a)}} notice designating an {{{{{1}}}|Early Termination Date}} for all outstanding {{{{{1}}}|Transaction}}s. It must be within 20 days. Let’s say it is the same day, for the hell of it | *T: You must send a Section {{{{{1}}}|6(a)}} notice designating an {{{{{1}}}|Early Termination Date}} for all outstanding {{{{{1}}}|Transaction}}s. It must be within 20 days. Let’s say it is the same day, for the hell of it | ||
*T: You are “off risk” and must start calculating your {{{{{1}}}|Close-out Amount}}s for all outstanding {{{{{1}}}|Transaction}}s. You must do this as soon as reasonably practicable. Let’s say that takes another 30 days. | *T: You are “off risk” and must start calculating your {{{{{1}}}|Close-out Amount}}s for all outstanding {{{{{1}}}|Transaction}}s. You must do this as soon as reasonably practicable. Let’s say that takes another 30 days. | ||
*T+30: having calculated all {{{{{1}}}|Close-out Amount}}s and totted them all up into a single {{{{{1}}}|Early Termination Amount}}: You send your Section | *T+30: having calculated all {{{{{1}}}|Close-out Amount}}s and totted them all up into a single {{{{{1}}}|Early Termination Amount}}: You send your Section {{{{{1}}}|6(d)}} statement advising of that amount, giving bank details and supplying your workings. | ||
*T+31: Your {{{{{1}}}|Early Termination Amount}} is due. | *T+31: Your {{{{{1}}}|Early Termination Amount}} is due. | ||
===In Full=== | |||
So, to close out following a {{{{{1}}}|Bankruptcy}}, you will need: | |||
==== 1. There must be a {{{{{1}}}|Bankruptcy}} under Section {{{{{1}}}|5(a)(vii)}} ==== | |||
There are nine different types of bankruptcy under the ISDA. Most are formal, public events (regulator institutes bankruptcy proceedings, administrator appointed, etc — watch too for local regulator actions and [[bail-in|bail in]]s specified in the {{isdama}} if your counterparty is a bank) that the would be widely known about. Others are less public and might happen more quickly. The ones most likely to happen first are: | |||
*becoming unable to pay debts as they fall due or admitting it in writing | |||
*making a composition with creditors | |||
*a secured party enforcing against substantially all assets (though “substantially all assets” is a high bar, and would not be likely to apply to a significant financial institution) | |||
Unlike a {{{{{1}}}|Failure to Pay}}, you do not need to wait for the close of business, or any [[grace period]]s to expire. | |||
==== 2. Send a Section {{{{{1}}}|6(a)}} notice designating an {{{{{1}}}|Early Termination Date}} ==== | |||
Once there is a live Bankruptcy Event, Section {{{{{1}}}|6(a)}} allows you, [[by not more than 20 days’ notice]], to designate an {{{{{1}}}|Early Termination Date}} for all outstanding {{{{{1}}}|Transaction}}s. | |||
So, at some point in the next twenty days outstanding {{{{{1}}}|Transaction}}s will be at an end. Now this is a different thing from knowing what the amounts will be, much less knowing when they will be paid ''or who will owe them'': this is the date by reference to which {{{{{1}}}|Termination Amount}}s ''will be calculated''. | |||
Usually, you will want to go “off risk” as quickly as possible, so the {{{{{1}}}|Early Termination Date}} will likely be the date you send your Section {{{{{1}}}|6(a)}} notice or soon after. ''[[By not more than 20 days’ notice|The 20 days’ time limit on the notice period is a red herring]]''. | |||
==== 3. Determine {{{{{1}}}|Close-out Amount}}s ==== | |||
Now, ascertain termination values for the {{{{{1}}}|Terminated Transaction}}s as of the {{{{{1}}}|Early Termination Date}} per the methodology set out in Section {{{{{1}}}|6(e)(i)}}. | |||
Section 6(c) reminds us for the avoidance of doubt that even if the {{{{{1}}}|Event of Default}} which triggers the {{{{{1}}}|Early Termination Date}} evaporates in the meantime — these things happen, okay? — yon Defaulting Party’s goose is still irretrievably cooked. | |||
The trading and risk people need to come up with {{{{{1}}}|Close-out Amount}}s for all outstanding {{{{{1}}}|Transaction}}s. Now note, even though you have designated an {{{{{1}}}|Early Termination Date}} not more than 20 days from your Section {{{{{1}}}|6(a)}} notice, it may well take you a lot longer to close out your portfolio than that, and as long as you are acting in a commercially reasonable way, you can take longer. There is a longer essay about the meaningless of that 20-day time limit here. | |||
Once they have done that you are ready for your Section 6(e) notice. | |||
==== 4. Calculate and notify ==== | |||
The {{{{{1}}}|Early Termination Date}} is the date on which the {{{{{1}}}|Transaction}}s terminate; it is the date by reference to which you calculate their termination values, not the date by which you have to have valued, much less ''settled'' outstanding amounts due as a result of their termination — that would be a logical impossibility for those not imbued with the power of foresight. | |||
Here we move onto Section {{{{{1}}}|6(d)}}, under which, as soon as is practicable after the {{{{{1}}}|Early Termination Date}}, your boffins work out all the termination values for each {{{{{1}}}|Transaction}}, tot them up to arrive at the Section {{{{{1}}}|6(e)}} amount, and send a statement to the defaulting party, specifying the {{{{{1}}}|Early Termination Amount}} payable, the bank details, and reasonable details of calculations. | |||
==== 5. Pay your {{{{{1}}}|Early Termination Amount}} ==== | |||
Your in-house metaphysicians having calculated your {{{{{1}}}|Close-out Amount}}s, and assembled all the values into an {{{{{1}}}|Early Termination Amount}} the party who owes it must pay the {{{{{1}}}|Early Termination Amount}}. With {{icds}}’s yen for infinite particularity, this will depend on whether the {{{{{1}}}|Early Termination Date}} follows an {{{{{1}}}|Event of Default}} or a {{{{{1}}}|Termination Event}}. If the former, the {{{{{1}}}|Early Termination Amount}} is payable at once, as soon as the {{{{{1}}}|6(d)}} statement is deemed delivered; if a {{{{{1}}}|Termination Event}}, only two {{{{{1}}}|Local Business Day}}s — I know, right — after the {{{{{1}}}|6(d)}} statement is delivered (or, where there are two Affected Parties and both are delivering each other {{{{{1}}}|6(d)}} statements — I know, right — after both have done so). |