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| {{a|isda| | | {{nman|isda|2002|Cross acceleration}} |
| [[File:Speedo.jpg|450px|thumb|center|[[Grace period]] be ''damned''.]]
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| <br>{{subtable|'''ISDA’s Cross Default clause in a {{nutshell}}'''<br>
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| {{Nutshell 2002 ISDA 5(a)(vi)}}}}
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| {{subtable|'''ISDA’s Cross Default clause in full'''<br>
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| {{ISDA Master Agreement 2002 5(a)(vi)}}
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| }}}}“[[Cross acceleration]]” is not an ''actual'' ISDA {{isdaprov|Event of Default}}, but it is what ''happens'' to an actual ISDA {{isdaprov|Event of Default}} — namely, the much-negotiated, seldom-used Section {{isdaprov|5(a)(vi)}}, {{isdaprov|Cross Default}}, if you can persuade your [[credit department]] to water it down to something sensible.
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| ==What and how==
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| ===Cross acceleration: what ''is'' it?===
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| {{cross acceleration capsule}}
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| ===How to change {{isdaprov|Cross Default}} to {{isdaprov|cross acceleration}} ===
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| You can amend {{isdaprov|Cross Default}} to {{isdaprov|Cross Acceleration}} by adding the following language:
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| :'''Section {{isdaprov|5(a)(vi)}} is amended by deleting “, or becoming capable at such time of being declared,” from subsection (1).''' <br>
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| Seems so easy, doesn’t it?
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| ==Why?==
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| ===Explain this wondrous drafting to me!===
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| {{isdaprov|Cross Default}}, as per the panel to the right, is triggered by two kinds of default:
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| *'''General default''': a general [[event of default]] of any kind at any time during the tenor of any {{isdaprov|Specified Indebtedness}} — this could be anything: the borrower’s bankruptcy, a breach of its reps and warranties, a non-payment of interest, any [[repudiatory breach]] of the contract of indebtedness, really; or
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| *'''Repayment default''': the borrower’s failure to fulfil, in full, final repayment of the debt itself when due.
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| Why draw a distinction between these two general default and repayment default, seeing as both of them are cataclysmic? There is an answer, but it is fussy, word-smithy stuff from [[the squad]], I’m afraid, readers: because a ''general'' default entitles the lender to ''accelerate'' the debt requiring the borrower to repay it at once, before its scheduled maturity date; a repayment default, logically, falls ''on'' that scheduled maturity date, and so can’t be “[[accelerated]]” as such. There ''is'' nothing to accelerate: the repayment date is already here.
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| Therefore to convert a [[cross default]] to a [[cross acceleration]], you only need to require ''general'' defaults to have been accelerated. Repayment defaults ''can’t'' be accelerated.
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| Cross acceleration also avoids the need to muck around allowing for [[grace period]]s to expire, granting indulgences for administrative and operational error and all that dreck: if the counterparty ''has actually accelerated the loan, the grace periods and operational errors are moot. It is too late. The game is up.
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| Now, to be sure, [[legal eagles]], especially the ''lesser-spotted [[buy-side legal eagle]]'', might start hopping up and down, flapping their wings and squawking restively at this point.
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| “But,” they will say, “what about [[grace period]]s and operational errors on that final payment? We must be allowed those before you can close us out!”
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| You may roll your eyes at this — the [[JC]] certainly does — and while it might make you feel better for a moment, it won’t make the problem go away. The short answer is that ''ordinary'' [[grace period]]s ''are'' factored in if you would care to read the language — the event isn’t triggered until they have all expired, and as for contractual affordances that don’t quite count as [[grace period]]s (that are, for example, dependent on the borrower providing evidence of [[operational error]] to give it some more time to pay) — well, on a [[fair, large and liberal]] view these count as [[grace period]]s anyway, and if you aren’t persuaded of that [[I’m not going to die in a ditch about it|am I going to die in a ditch about it]]? It depends how late it is on a Friday. At the time of writing it is 6:30 pm and the [[JC]] is like ''oh pleeeeease''.
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| ==But...==
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| ===Is “downgrading” to [[cross acceleration]] ''wise'', though?===
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| There are two schools of thought:
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| *'''Yes''': The sensible, pragmatic, wise, [[noble, fearless and brave]] one you will find in these pages: “''Yes''. [[Cross default]] is misplaced in a modern daily-collateralised {{isda}}. Anything you can do either to restrict its scope, or simply to avoid being dragged into a [[tedious]] argument ''about'' its scope, is worth doing.”
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| *'''No''': The learned one, from the learned author of that terrible [[FT book about derivatives]]: “All other things being equal, ''no''. One should only soften [[cross default]] reluctantly. Because other counterparts might not be so weak.”
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| With respect to my learned friend, his reasoning isn’t massively compelling, as it rather mischaracterises what is going on:
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| :''With [[cross acceleration]] the innocent third party actually has to start proceedings against the defaulting counterparty before you can trigger your transaction termination rights ...
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| Actually, it doesn’t have to ''sue'' your counterparty; just call its debt in.
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| :''The downgrading [of cross-default to cross acceleration] therefore affects the timing of your right to terminate, It is no longer automatic but deferred.''
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| I have no idea what the learned author means here by “automatic” here: either way your termination right is ''optional'', not ''automatic'', but in either case it is contingent on a differennt independent event: in one case, the default; in the other, a lender’s ''acceleration'' following the default.
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| :''If the third party is your counterparty’s main relationship [[bank]] it may take some time to review its position...
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| Indeed it may, and probably will. ''But while it is doing that it is not accelerating its claim against your counterparty.'' It is granting its customer, and your counterparty, an indulgence. ''Your'' position is, therefore, not worsened in the meantime.
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| :''... and may propose a compromise which does not suit you.
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| You, bear in mind, are the owner of a fully collateralised {{isdama}} which the counterparty has, in the meantime, continued faithfully to perform. If one of your co-creditors has granted an indulgence on outstanding indebtedness — even in return for some other surety or compromise — which avoid that debt being accelerated in full, how can that by itself make your position worse?
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| :''I believe such downgrade requests should only be considered favourably if specific foreseeable circumstances justify them [...] or if your counterparty gives written confirmation that cross acceleration applies to all its agreements and will do so in the future. This is because if even one counterparty has {{isdaprov|Cross Default}} it would be in pole position to trigger its termination rights.
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| On this last point, the learned author is, technically, correct: you are marginally worse off if you have conceded [[cross acceleration]] and other swap counterparties have not. They can beat you, and your counterparty’s main relationship bank, to the punch, assuming they are cowboys who view a [[relationship contract]] like an {{isdama}} as something that it should be a race to close out. Brokers that the [[JC]] knows don’t tend to think that way. They have compliance officers who will quail at the thought of not treating their customers fairly. In any case, the fact that this ''could'' happen ''just illustrates how stupid the concept of cross-default is''. ''Especially'' in our enlightened age of zero-threshold, [[variation margin|daily margined]] non-exotic swap contracts. ''Especially'' given the extreme conceptual difficulty of even gathering enough information to work out whether you even ''can'' exercise your stupid [[cross default]] right.
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| Just how a third party would ever be able to assess the value of defaulted {{isdaprov|Specified Indebtedness}} has never been explained to this old goat.
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| So this is angel-on-the-head-of-a-pin stuff indeed.
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| {{sa}}
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| *{{isdaprov|Cross Default}} under the {{isdama}}
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| *[[Cross default]] generally
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| {{ref}}
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2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
Cross acceleration in a Nutshell™
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The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. You can even ask questions! Ask about it here.
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Original text
Section 5(a)(vi) is amended by deleting “, or becoming capable at such time of being declared,” from subsection (1).
By way of reminder:
- 5(a)(vi) Cross-Default. If “Cross-Default” is specified in the Schedule as applying to the party, the occurrence or existence of:―
- (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) where the aggregate principal amount of such agreements or instruments, either alone or together with the amount, if any, referred to in clause (2) below, is not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming
, or becoming capable at such time of being declared, due and payable under such agreements or instruments before it would otherwise have been due and payable; or
- (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments under such agreements or instruments on the due date for payment (after giving effect to any applicable notice requirement or grace period) in an aggregate amount, either alone or together with the amount, if any, referred to in clause (1) above, of not less than the applicable Threshold Amount;
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Resources and Navigation
Index: Click ᐅ to expand:
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Comparisons
Well, it doesn’t, as such, appear in the ISDA Master Agreement at all, but you could always have a look at our long-winded article about Cross Default to see how that works and why Cross Acceleration is different and, in JC’s view, a better approach to a bad deal.
Basics
Cross Acceleration: Cross Default for nice guys
Cross acceleration is not an actual ISDA Event of Default, but it is what happens to Cross Default if only you can persuade your credit department to water it down to something kinder and gentler. Cross Acceleration harks to a world in which people wait for third party indebtedness to be actually accelerated before closing out their ISDAs.
It is only an Event of Default once the Defaulting Party’s third-party lenders have actually accelerated Specified Indebtedness in an amount exceeding the Threshold Amount.
That is a much less sensitive trigger — a much worse trigger, a credit officer might say, but bear with me — and it avoids that weird scenario when the actual lender has not itself exercised its default rights, but you have exercised yours, even though your counterparty is still performing your contract to the letter.
Cross acceleration also avoids indeterminacy and nervousness of waiting for grace periods you might not know about to expire, oral waivers or amendments to the third party contract, granting indulgences for administrative and operational error and all that dreck: if the lender has actually accelerated the loan, grace periods and operational errors must have expired and therefore no longer matter. It is too late. The game is up.
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See also
References