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| In which JC ventures forth, unbidden, onto the topic of ''what makes a good ISDA''. Mainly the same things that make ''any'' commercial contract good, but let’s not spoil a good story.
| | So, what makes for a good ISDA? What makes ''any'' commercial contract good? |
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| The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to ''avoid'' controversy — it goes without saying “the sacred fourteen” are already immaculate: we mean, of course, what makes a good ISDA ''{{isdaprov|Schedule}}''. For it will be toiling over that grubby mortal [[appendix]] — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a [[negotiator]] will live out her days.<Ref>What is the difference between a schedule, an appendix and an annex?</ref>
| | Bear in mind that a contract fulfils different purposes for different constituents during its life. For [[Sales]], it is a tool of [[persuasion]]. For [[Credit]], a long-range defensive strategy. For [[Operations]], a manual. For the [[Legal Eagles]], a ''crust''.<ref>There is an expanded riff on this for, premium subscribers, [https://jollycontrarian.com/secure/index.php?title=Purpose '''here'''].</ref> |
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| A scan of the sub-headings below will betray JC’s view: it should have five basic qualities: ''fairness'', ''clarity'', ''consistency'', ''simplicity'' and aptness to instil ''confidence''. These qualities interact with and, in large part, depend on each other.
| | Crystalline legal exactitude is but one quality and, in most cases an oddly insignificant one in that, once a contract is signed, the overwhelming likelihood is that ''no-one will ever look at it again''. Not even Ops, once they have punched the collateral eligibility criteria into their systems. |
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| | The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to ''avoid'' controversy — it goes without saying “[[the sacred fourteen]]” are already immaculate: we mean, of course, “what makes a good ISDA ''{{isdaprov|Schedule}}''”. For it will be toiling over that grubby mortal [[appendix]] — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a [[negotiator]] will live out her days.<Ref>What is the difference between [[appendix|a schedule, an appendix and an annex]]?</ref> |
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| | It should have five basic qualities: ''fairness'', ''confidence'', ''clarity'', ''consistency'' and ''simplicity''. These qualities interact with and, in large part, depend on each other. |
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| ''Fair'' agreements must be ''clear'' for customers to realise they are fair. | | ''Fair'' agreements must be ''clear'' for customers to realise they are fair. |
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| ''Clarity'' and ''fairness'' lend themselves also to ''consistency'' since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object. | | ''Clarity'' and ''fairness'' lend themselves also to ''consistency'' since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object. |
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| ''Clarity'', ''fairness'', ''confidence'' and ''consistency'' make for ''simplicity'': a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce. | | ''Clarity'', ''fairness'', ''confidence'' and ''consistency'' make for ''simplicity'': a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce. |
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| ===Fairness=== | | ===Fairness=== |
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| {{Drop|[[Qualities of a good ISDA|F]]|airness as an}} abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in [[alternative dispute resolution]] class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal [[negotiation]] as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so ''fairness'' never gets a chance to break out. | | {{Drop|[[Qualities of a good ISDA|F]]|airness as an}} abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in [[alternative dispute resolution]] class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal [[negotiation]] as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so ''fairness'' never gets a chance to break out. |
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| This is, in theory, odd. Why the hostility? After all, between good-faith traders in the marketplace, commercial negotiation is no [[single round prisoner’s dilemma]]. To show fairness is not to show weakness, but ''strength''. We might have an answer by asking: [[cui bono]]?<ref>Usually, when JC asks this rhetorical question, the answer is the same: the [[agent]]. This is no exception.</ref> | | This is, in theory, odd. After all, between good-faith traders in the marketplace, commercial negotiation is no [[single round prisoner’s dilemma]]. To show fairness is not to show weakness, but ''strength''. |
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| JC is, by lifelong experience, a [[sell-side]] guy: he comes at this from the perspective of a business contracting with its customers. Merchant and customer are, generally, on the same side: at the limit their interests conflict, but gently: the merchant wants a [[commission]] or a mark-up, the customer wants a good price, but beyond that each wishes earnestly for the other’s continued prosperity.
| | So why the hostility? Puzzles like this often boil down to variations of the [[agency problem]]. They can usually be untangled by asking, ''[[cui bono]]''? Usually, we will find a well-meaning professional adviser “making herself useful” by “[[for the avoidance of doubt|avoiding doubt]]”. This is no exception. |
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| Things ''can'' get chewy at the extremes — but most dealers and most customers never get near a [[tail event|chewy extreme]].
| | JC is, by lifelong experience, a [[sell-side]] guy: his clients are ''providers'' of financial services who contract with people who ''want'' them. Merchant and customer are, here as in any marketplace, generally aligned: at the limit, their interests conflict, but gently: the merchant wants a big [[commission]], the customer wants to pay a little one, but beyond that, each wishes earnestly for the other’s continued prosperity. |
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| Sell-siders may occasionally engage with ostensible ''hostiles'' — competitors, for example — but when we do, there is an unspoken pact of [[good faith]] for the limited ends which have brought our warring sides together. We must, at some level, trust one other or at least have a common interest. If we did not, would not contract at all.<ref>[[David Graeber]] makes a fascinating point when discussing the ''non''-origin of currency out from [[barter]]: [[barter]] is an arm’s length trade of equivalent goods conducted between parties who are dispositionally ''rivals'' and not partners. Once the exchange happens, nothing is left on the table; there is no presumption of enduring goodwill, no expectation of further business, or any kind of obligation undischarged. A barter is an exchange conducted with untrusted aliens. Inside your community, where there is trust, we are less compelled to extract our precise pound of flesh: there is a give and take; we let obligations lie undischarged and they acquire a moral quality. These are the ties that bind — the imperative becomes to ''avoid'' fully discharging our dues to each other. This is the relationship we should aspire to with our customers. We trust them to pay later — we extend ''credit''. (Hence money emerged not from fair value barter with strangers but as a way of evidencing indebtedness amongst those who knew each other. You don't extend credit to aliens.</ref>
| | Things ''can'' get chewy at the extremes when large sums of money are involved — but most dealers and most customers never get near a [[tail event|chewy extreme]]. |
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| So we presume [[good faith]] in any negotiation: ''some'' level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “{{plainlink|https://www.bbc.co.uk/iplayer/episode/m001w2dd/the-traitors-australia-series-2-episode-9|traitor’s dilemma}}”. This makes for good TV, but bad business.
| | We occasionally engage directly with ostensible ''hostiles'' — competitors, for example — but even then, we do so under an unspoken pact of [[good faith]] for the limited ends which have brought us together. We must, at some level, trust those with whom we contract, even if they are rivals. We must have some common interest. If we did not, we would not contract at all. {{maxim|No-one enters a contract she expects her counterparty to break}}. |
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| In any case, the “merchant-to-customer” contract is, by a landslide, the most common kind. Once finalised, these are filed somewhere and never again reviewed, even should there later be an argument. Those with any [[inhouse counsel]] experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, when there isn’t — ''the business will roll over''. No-one takes a point with a [[Insolvency|solvent]] client.
| | Sidenote: the late [[David Graeber]] made a fascinating point when discussing the ''non''-origin of money from [[barter]]: [[barter]] is an arm’s length trade of equivalent goods between parties who are dispositionally ''rivals'' and not partners. |
| | Once the exchange happens, nothing is left on the table; there is no presumption of goodwill, no expectation of further business, no obligations are undischarged. This is a [[delivery-versus-payment]] exchange between untrusting aliens. This is not needed within a community of trust. Where there is trust we need not extract a pound of flesh: there is a give and take; we let obligations lie undischarged on faith they will be performed later. Our gestures acquire a moral quality. These are the ties that bind — the imperative becomes to ''avoid'' fully discharging our dues to each other and thereby undoing those ties. |
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| This is nothing more than common sense: you stand to gain far more in future revenue by preserving your relationship even where that means excusing a customer the occasional gaffe than you do by taking a literal stance on technical errors. | | This is the relationship we should aspire to with our customers. We trust them to pay later — we extend ''credit''. We do them favours, they appreciate it, and reward us with social, not economic, capital in the shape of more business. Hence, says [[David Graeber|Graeber]], money emerged not from barter with strangers, but to memorialise mutual debts among friends. You don’t extend credit to your enemies. |
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| The instinct amongst business people to “just let it go” is so pronounced, indeed, that compliance teams have found ways to prevent this happening for fear it is seen as an impermissible “inducement”.<ref>Were it not for the deeply embedded [[agency problem]] inside most organisations, by dint of which these arrangements could well be, this would be a bit silly. As It is, it probably isn’t.</ref>
| | So, we presume [[good faith]] in any negotiation: ''some'' level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “{{plainlink|https://www.bbc.co.uk/iplayer/episode/m001w2dd/the-traitors-australia-series-2-episode-9|traitor’s dilemma}}”. This makes for good TV, but bad business. |
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| In any case, the [[commercial imperative]] is so overwhelming a factor in ongoing business relationship that there is little point in asking for, let alone achieving, terms that go beyond “fair”. ''No-one will ever use them''. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — [[the ideal negotiation is no negotiation|the ideal negotiation is ''no'' negotiation]] — you should start with a fair template.
| | The “merchant-to-customer” contract is, by a landslide, the most common kind. Once signed, these are filed somewhere and never again reviewed — it is bad form to pay too much attention to the letter of a deal, even should there later be an argument.<ref>{{maxim|if you have to go to the contract, you’ve already lost}}.</ref> |
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| Make your templates ''fair''.
| | [[Inhouse counsel]] with experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, even when there isn’t — ''the business will roll over''. No-one takes a point with a [[Insolvency|solvent]] client. |
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| ===Confidence===
| | This is no more than [[commercial imperative|commercial common sense]]: you stand to gain far more by preserving your relationship, even where that means excusing a customer the occasional gaffe, and ''trading'' on it than you do by taking a literal stance on technical indiscretions. That is ''[[barter]]'' behaviour. |
| {{Drop|Y|our form should}} also inspire confidence, not fear, in your own negotiating team. It is a fact of life that negotiators these days have less combat experience and expertise than they once had. To do a good job they must be comfortable with their tools, not scared of them. They should ''understand'' the templates they use and the products they govern. They should go beyond the contract’s formal articulation to grasp the underlying commercial drivers of the relationship.<ref>JC is well aware that, among [[management consultant]]s, this view borders on the heretical.</ref> If they do, they can help you identify the parts of the contract that aren’t achieving what they seem to be.
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| A negotiator who [[fear|''fears'']] her material will hide behind the formal rules you give her to manage it. She won’t be drawn to discuss anything live — if she doesn’t understand the form, why would she put her vulnerability on show? — so will hide behind her keyboard, contributing to the familiar experience of electronic trench warfare: she will lob long, bulleted issues lists over no-man’s-land and into the enemy’s advanced positions, or escalate that way internally to risk departments. When they land her missiles — missives? — will hiss and sputter, being passed about for days, before eventually being lobbed back, appended with yet more more bullets and annotated in [[BLOCK CAPITALS]] or a fetching {{Fontcolour|#FF00D4|'''hot pink'''}}. This impasse can last, as it did in Ypres, for years. You could write [[strange negotiation|war poetry]] about it.
| | This instinct amongst business people to “just let it go” is so pronounced, indeed, as to unnerve regulators and [[compliance]] departments, who have contrived ways to stop it, for fear it “induces” — a fancy way of saying “bribes” — clients to continue giving business.<ref>Were it not for the deeply embedded [[agency problem]] inside most organisations, by dint of which these arrangements could well be, this would be a bit silly. As it is, it probably isn’t. There it goes: the good old [[agency problem]], again.</ref> |
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| {{Quote|
| | In any case, the [[commercial imperative]] is so overwhelming that there is little point in asking for, let alone achieving, terms in contracts that go beyond “fair”. ''You will never use them''. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — {{maxim|the ideal negotiation is no negotiation}} — it behoves you to have a fair template. |
| “I am the [[NAV trigger]] you pulled, my friend. You [[Waive|waived]] it not. <br>
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| In fog of war your unbending risk approach you would not flout<br>
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| Look, I missed a little [[margin call]], by just a bit: you [[Close out|closed me out]]. <br>
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| I risk-reduced as best I could; when all is told <br>
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| My lucky streak ran out; <br>
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| My credit line went cold. <br>
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| Let us sleep now. . . .”<br>
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| ''carries on for [[strange negotiation|94 pages]]''}}
| | Make your templates ''fair''. |
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| Reverence to and intimidation by your own contractual form is madness, of course. While we should not be surprised, in our [[High modernism|high modernist]] times, that our overlords fetishise the [[Substance and form|form over substance]], ''deference'' to a contractual form that is plainly suboptimal is no cause for celebration. A confident negotiating team ''engages'' with the form rather than deferring to it. This is the negotiator’s version of “[[jidoka]]”: the “human touch” that makes the machine sing.
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| Make sure your team have ''confidence'' in your forms. | |
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| === Clarity ===
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| {{Drop|[[Qualities of a good ISDA|O]]|f the many}} [[The purpose of an ISDA|purposes of the ISDA]], most deal with the ''present'' — desired capital treatment; the availability of close-out [[Close-out netting|netting]], margin obligations — and the ''past'' —representations and warranties, and [[Section 2(a)(iii) - ISDA Provision|conditions precedent to transacting and continuing to perform]] — but only one deals with the ''future''. The close-out terms: the circumstance in which one can break the glass, sound the alarm and head for the lifeboats.
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| Closeout terms will only come into serious contemplation at times of extreme stress: the market’s, your management’s and, therefore, ''yours''. The more the firm stands to lose, the more extreme those stressy circumstances are likely to be. Your management will be going mad — make no bones about that — but so will the market and, quite possibly, the geopolitical situation too. All kinds of people will be doing inexplicable things.
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| Defaulting customers will be absent without official leave, responding to no communication channels at all. Bank chief executives won’t take each other’s calls. Prime Ministers will be ordering overseas embassies to max out their credit cards just to have cash on hand to meet the government’s obligations.<ref>This happened in New Zealand in 1981. [[Wage and price freeze|True story]]. </ref> Central bankers will be ordering the banks they regulate to lowball [[London Inter Bank Offered Rate|LIBOR]].<ref>Controversial, I know, but this seems increasingly likely to have been the case.</ref>
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| We do not imagine that, when they crafted its close-out mechanics, the ’squad had in mind the wider general ''ambiance'' in which the ISDA’s s last-resort rights would be exercised. They ''can’t'' have. We imagine they pictured the close-out urge coming upon the responsible credit officer, in isolation, at a time of beatific placidity: that there would be time and space to consider and quietly contemplate what must be done, perhaps with a frisson of regret for the poor customer whom one is letting down.
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| ''It will not be like that.''
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| There will be multiple counterparty failures at once. All kinds of things will be stretching your attention, and your management’s. There will be allegations — unproven, unverifiable, and likely false ''but at the time you won’t know it'' — of fraud, of dastardly dealing, of internecine conflicts within the client, of side-conversations with your CEO who is allegedly related to the chief investment officer by marriage, of predatory competitors beating you to the close-out punch and eating your lunch. All of this is the fog of war.
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| Even among those who had them in the first place, patience and a sense of humour will be in short supply. People — many, ''many'' people — will want short, clipped answers to different questions they are all shouting at you at once — questions ''to which there are no short, clipped answers''. If you even understand the question, the last thing anyone wants to hear by way of answer is, “ahhh, it’s ''complicated''” or, God forbid, “the contract is not clear.”
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| And bet your bottom dollar, it will ''not'' be clear.
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| This, counsels, we think — and we are obliged to say the JC seems to be on his own about this one — a discipline in times of fine weather and fecund trading conditions, to make sure your contracts have short, clear, plain and ''blunt'' termination language, with simple-to-follow events addressing only generally catastrophic circumstances. The day when you need your contracts will be omnishambles enough without disastrous, baffling contracts making it worse.
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| Most of the weapons you need are embedded in the pre-printed form of the ISDA Master Agreement itself. Do not mess around with these. Try to resist the temptation to augment them, and have ready-at-hand a simple step-by-step guide to how to get through them without screwing anything up.
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| Like [[Closing out an ISDA|'''this one''']].
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| Make your forms ''clear'' and easy to follow in moments of existential crisis.
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| === Consistency ===
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| {{Drop|I|t helps with}} clarity if, in a scrape, you know what your ISDA will say where it matters. You can be sure of this if you control quality where it matters. (Where it doesn’t — and with all the will in the world there are open tracts of most ISDA Schedules which will never have practical impact on anything, you can afford to take a view.)
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| “This is all very well but how, JC, are we supposed to force a counterparty to take our credit terms? It is a competitive market! No-one in their right mind would do that! We must negotiate every time! And plus, we can’t stop our counterparties insisting on bespoke terms, you know: this is a client service business! We cannot dictate!”
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| Quite so: and to get you through the livelong day we commend [[serenity’s prayer]] to you.
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| You cannot control everything, it is true. But there are some things you ''can'' control: the starting point for your own docs, for one thing — and some things certainly cannot be able to: the customer’s pet peeves.
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| But pet peeves have the general quality of being correct: few people are peeved at a failure to pay clause.
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| If you configure your human system to constantly ''sand off'' rough edges when you encounter them then these pet peeves serve as a kind of carborundum.
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| It is a curious fact that augmentations to a template — scar tissue from previous wounds —have a habit of sticking to your legal forms, whereas simplifications do not. This is a cultural matter. It is in your gift to change it. You just need to take hearts and minds with you.
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| If you start off with something you know to be offensive do not be surprised when they do not accept it.
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| A useful rhetorical, seldom posed, is:
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| {{Quote|If someone presented this term to me, would ''I'' accept it?}}
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| Rebase your documents to be acceptable to the person on the Clapham omnibus, at least ''in concept'', from the off. Legal advisors are already incentivised to seek changes as a means of demonstrating their [[legal value|value]]. Why start with a form with which any sane advisor would ''have'' to take issue?
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| ====“Platinum plating”====
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| A common gambit here is a sort of “quality triage”: it is a truism that a few special, “[[Platinum client|platinum]]” customers will generate disproportionate revenues for the firm, and a large morass will be reliable but unremarkable. The thinking goes that one should therefore offer “platinum” customers better terms than regular ones, to the point where some firms even offer different starting points to different clients.
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| In its unstated assumption that tedious legal wrangling is a kind of punishment for mediocrity, this has things precisely backward: platinum customers generate that colossal revenue by ''taking the most risk'' with the bank’s money. They may be better run, with more powerful systems and heavier infrastructure, but that doesn’t mean they can’t blow up, and if they do they will leave a much bigger crater. These are precisely the clients with whom your legal agreements should be ''strongest''.
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| The converse is this: if your [[platinum client]] documentation is fit for the big risk-takers, then ''it is fit for everyone else too''. You don’t need better terms with smaller fry. The purpose of legal documentation is sometimes opaque but it is not ritualistic punishment. Offering “platinum terms” to regular customers will also reduce how much time you spend — ''[[waste]]'' — haggling with customers who will present you less risk and generate less revenue.
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| Nor does lowering your starting bid weaken your negotiating position. Brokerage is not a [[zero-sum game]]. There are no points for securing stronger risk terms than you need — it does not necessarily translate to less risk — and your walk-away point remains your walk-away point however close you start to it. From a resourcing perspective, the sooner you get to agreement, or the walkaway point, the better.
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| And if you are diligent, consistent and rigorous in this approach, your customers and their advisors will figure this out. They will tire of banging their heads against a brick wall for the sake of improving what is already a reasonable position.
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| === Simplicity ===
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| {{Drop|A|ll else being}} equal, make it ''simple''. This, of course, depends on your counterpart: you can’t clap one-handed, and a dogged pettifogger who takes pride in convolution — there are many of these — will not be assuaged by your best intentions, however noble. She will have her [[severability]] boilerplate, and that is that.
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| But [[Pragmatist’s prayer|Serenity’s Prayer]] is your friend, all the same. Sure; there are things you cannot change — bear them with good grace and a joyful heart — but just as many yet that you ''can'': you may have to live with whatever pedantry is flung back to you but do not ''court'' it by needlessly complicating what you send out.
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| Convolution causes confusion. Confusion causes fear and requires explanation. Explanation leads — perhaps, eventually — to resolution, but takes time, burns resources, and comes at the cost of variance from your ideal. All this mucking around invites pedantry, should your counterparty’s advisers be given to pedantry. Lawyers, by nature, are given to pedantry.
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| In essence: having to explain something that ''could'' have been clear in the first place, without loss of emphasis is, at least, wasted energy.
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| Use plain language. Short sentences, modern language. Use “you must ~” rather than “Party B shall be obligated to ~”; Use “we may ~” rather than “Party A shall be entitled but, for the avoidance of doubt, not obliged to ~”.
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| Write ''agreeably''. You have choices in how your institution expresses itself: these can influence the critical path of your negotiation. ''Don’t poke your customer with a [[sharpened stick]]''. Take lessons from Dale Carnegie: try to win friends and influence people. There are polite, agreeable and damnable ways of saying the same thing.
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| Compare:
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| {{Quote|Customer shall be obliged forthwith upon demand and from time to time unconditionally to indemnify and hold the Bank harmless, without set-off, limitation or counterclaim, in the event the Bank or any one or more of its affiliates, agents, nominees or sub-custodians, howsoever described, suffers or incurs, or determines in its absolute discretion that it is or may be likely to suffer or incur, any custom, duty, excise, taxation, stamp or withholding, levy, deduction or charge of whatsoever nature, including penalties, costs, charges and legal expenses incurred in respect thereof, with regard to or in respect of any of Customer’s assets held by or in the name of or in the custody network of the Bank in connection with this Agreement or otherwise.}}
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| with:
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| {{Quote|“If we incur any tax while holding assets for you under this contract, you must reimburse us upon request.”}}
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| Simple, too, aids easy comprehension at a time when things are going to hell.
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| Almost all the tools you need are in the master. It bears repeating that, in these days of daily [[variation margin]], it will be a rare day when your only option to close out a loss-making ISDA will be a [[NAV trigger]] or a [[key person clause]].
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| ===What you can do about it===
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| {{drop|“T|his is all}} very well, JC, but ''come on''. What hope have I, a mere [[subject matter expert]], of influencing an organisation’s sacred forms? Hell will surely first freeze over.”
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| It is only a truism that {{shitmaxim|nothing is more immutable than policy}} if ''no-one ever challenges it''. And who better to challenge it than she who suffers under its yoke?
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| Pray, forgive JCs’ rabble-rousing, but is not that lusty challenge the very thing your experience offers? Is not that your very superpower? The rush of healing air that the wounds and scars of a long history of misadventure — which, above all, informs said “immutable policy” — cannot withstand? And if not, why not? What does that then say about your life’s work? That you are but a painted ship upon a painted ocean?
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| We hope this is mere rhetorical conjecture.So try it! Go on! What have you got to lose? You might be surprised at what you can achieve.
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| Of course, your counterparty’s negotiators are no less institutionalised. Having, by and large, been forged in the same private practice sweatshops (or [[Proverbial school-leaver from Bucharest|Bulgarian call centres]]) they too have expectations of a certain form and they fear, as much as you do, stepping away from it. Time for some bracing pep talk from Mr Nieztsche:
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| {{quote|
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| “For believe me! — the secret for harvesting from existence the greatest fruitfulness and the greatest enjoyment is: to ''live dangerously''! Build your cities on the slopes of Vesuvius! Send your ships into uncharted seas! Live at war with your peers and yourselves! Be robbers and conquerors as long as you cannot be rulers and possessors, you seekers of knowledge! Soon the age will be past when you could be content to live hidden in forests like shy deer!”}}
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| JC’s anecdotal evidence is that suspicion quickly gives way to ''relief''. If you get your design right — this is a big if: from the cradle, lawyers are bathed nightly in [[legalese]] and can scarcely live without it — your counterparts will quickly see its wisdom. Negotiators have enough time thrashing through everyone else’s ghastly forms and will be glad if the relief offered by an easy one.
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| ''If you don’t ask, you won’t get.'' | |
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| ====“Change is disruptive and risky”====
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| No-one likes change for change’s sake.
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So, what makes for a good ISDA? What makes any commercial contract good?
Bear in mind that a contract fulfils different purposes for different constituents during its life. For Sales, it is a tool of persuasion. For Credit, a long-range defensive strategy. For Operations, a manual. For the Legal Eagles, a crust.[1]
Crystalline legal exactitude is but one quality and, in most cases an oddly insignificant one in that, once a contract is signed, the overwhelming likelihood is that no-one will ever look at it again. Not even Ops, once they have punched the collateral eligibility criteria into their systems.
The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to avoid controversy — it goes without saying “the sacred fourteen” are already immaculate: we mean, of course, “what makes a good ISDA Schedule”. For it will be toiling over that grubby mortal appendix — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a negotiator will live out her days.[2]
It should have five basic qualities: fairness, confidence, clarity, consistency and simplicity. These qualities interact with and, in large part, depend on each other.
Fair agreements must be clear for customers to realise they are fair.
Clear agreements will inspire confidence, in your own staff, thus distracting them from the temptations of Casanova’s principle and toward fairness.
Clarity and fairness lend themselves also to consistency since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object.
Clarity, fairness, confidence and consistency make for simplicity: a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce.
Fairness
“There could be no negotiating with terrorists.”
- —Attributed to Richard Nixon
Fairness as an abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in alternative dispute resolution class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal negotiation as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so fairness never gets a chance to break out.
This is, in theory, odd. After all, between good-faith traders in the marketplace, commercial negotiation is no single round prisoner’s dilemma. To show fairness is not to show weakness, but strength.
So why the hostility? Puzzles like this often boil down to variations of the agency problem. They can usually be untangled by asking, cui bono? Usually, we will find a well-meaning professional adviser “making herself useful” by “avoiding doubt”. This is no exception.
JC is, by lifelong experience, a sell-side guy: his clients are providers of financial services who contract with people who want them. Merchant and customer are, here as in any marketplace, generally aligned: at the limit, their interests conflict, but gently: the merchant wants a big commission, the customer wants to pay a little one, but beyond that, each wishes earnestly for the other’s continued prosperity.
Things can get chewy at the extremes when large sums of money are involved — but most dealers and most customers never get near a chewy extreme.
We occasionally engage directly with ostensible hostiles — competitors, for example — but even then, we do so under an unspoken pact of good faith for the limited ends which have brought us together. We must, at some level, trust those with whom we contract, even if they are rivals. We must have some common interest. If we did not, we would not contract at all. No-one enters a contract she expects her counterparty to break.
Sidenote: the late David Graeber made a fascinating point when discussing the non-origin of money from barter: barter is an arm’s length trade of equivalent goods between parties who are dispositionally rivals and not partners.
Once the exchange happens, nothing is left on the table; there is no presumption of goodwill, no expectation of further business, no obligations are undischarged. This is a delivery-versus-payment exchange between untrusting aliens. This is not needed within a community of trust. Where there is trust we need not extract a pound of flesh: there is a give and take; we let obligations lie undischarged on faith they will be performed later. Our gestures acquire a moral quality. These are the ties that bind — the imperative becomes to avoid fully discharging our dues to each other and thereby undoing those ties.
This is the relationship we should aspire to with our customers. We trust them to pay later — we extend credit. We do them favours, they appreciate it, and reward us with social, not economic, capital in the shape of more business. Hence, says Graeber, money emerged not from barter with strangers, but to memorialise mutual debts among friends. You don’t extend credit to your enemies.
So, we presume good faith in any negotiation: some level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “traitor’s dilemma”. This makes for good TV, but bad business.
The “merchant-to-customer” contract is, by a landslide, the most common kind. Once signed, these are filed somewhere and never again reviewed — it is bad form to pay too much attention to the letter of a deal, even should there later be an argument.[3]
Inhouse counsel with experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, even when there isn’t — the business will roll over. No-one takes a point with a solvent client.
This is no more than commercial common sense: you stand to gain far more by preserving your relationship, even where that means excusing a customer the occasional gaffe, and trading on it than you do by taking a literal stance on technical indiscretions. That is barter behaviour.
This instinct amongst business people to “just let it go” is so pronounced, indeed, as to unnerve regulators and compliance departments, who have contrived ways to stop it, for fear it “induces” — a fancy way of saying “bribes” — clients to continue giving business.[4]
In any case, the commercial imperative is so overwhelming that there is little point in asking for, let alone achieving, terms in contracts that go beyond “fair”. You will never use them. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — the ideal negotiation is no negotiation — it behoves you to have a fair template.
Make your templates fair.