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| {{freeessay|isda|tail events|}}{{d|Tail event||n|}} | | {{freeessay|isda|tail events|{{image|Tail event|jpg|}}}} |
| {{L1}}'''Statistics''': Of a range of possible independent events, one whose frequency is three or more [[Normal distribution|standard deviation]]s from the mean. An event with a low [[probability]]. <li>
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| '''Work life''': An unwanted outcome to which you weren’t paying attention, which you didn’t expect and, therefore, for which you don’t think you should be blamed.
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| </Ol>
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| We are, as the JC frequently complains, in a swoon to the [[Reductionism|reducibility]] of all things.
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| This usually involves converting all the things that we do and that happen to us into numerical [[data]] points.
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| Data points, in themselves, are no more naturally [[effable]] than “odd things that happen to us” from which they are extruded, of course. But numbers have the quality of submitting easily to aggregation, symbolic manipulation and statistical techniques, in a way that “odd things that happen to us” do not.
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| Once one has rendered as data, one can calculate a mean, median and mode. One can formulate probability calculations.
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| In the same way that one can calculate the probability of rolling consecutive sixes (1/36) so, it seems, one can calculate the probability of rain tomorrow, a cut in stamp duty in the spring, or a thirty-point intraday drop in the NASDAQ.
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| Numbers are under our control. They ''behave''. They bend to the spreadsheet’s will.
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| Except, as [[David Viniar]]’s immortal words remind us, the events these numbers represent — the territory for which they are a map — are wont to have other ideas.
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| {{quote|{{viniarquote}}}}
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| But there is a great difference between rolling dice and a stock market. A die is a “[[nomological machine]]”: a carefully constrained, sealed environment, designed to yield a specific theoretical outcome. The dice-rolling map is, as far as engineering permits, ''identical'' to the dice-rolling territory. We can, indeed, generate an indistinguishable outcome purely by running the model with a random number generator. The machined dice, the flat, constrained surface — these are a representation of the reality, which is the hypothetical model, and not the other way around. A loaded die is a ''flawed'' machine. You don't chuck out the theory: you chuck out the equipment.
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| Likewise, if, inside your nomological machine there is a mischievous imp who catches and places the die as it sees fit, the conditions for your probabilistic calculation do not prevail. There is an interfering causal agent.
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| “Nomological machines” are highly constrained, artificial environments. If all their conditions are not satisfied, we can expect the world to behave differently without validating the machine. This is how, as [[Nancy Cartwright]] put it “the laws of physics lie”.
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| In any case, these are the circumstances in which the rules of probability prevail. Should the universe misbehave
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| ====Derivatives trading====
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| In the context of trading derivatives, things that (a) you didn't reasonably expect and that . (b) bugger up your contract.
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| =====Credit defaults=====
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| A swap being a private, bilateral affair, the most obvious category of tail events is “things which mean your counterparty cannot, or will not, or has not, performed its end of the deal”.
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| Straight out refusal to — repudiation — is rare, at least without the cloak of some kind of dispute as to whether the party was under such an obligation in the first place.
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| Inability is the main player here: generally captured by insolvency, and correlative defaults under other agreements.
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| Much of financial services being a play on [[leverage]] — the name of the game being to earn more, with other people’s money, than it costs you to borrow it — many market participants flirt with various formulations of [[insolvency]] as a basic business model, so there tend to be some pushback on the parameters of these correlative failures and “ostensible inabilities” to perform. Much of a [[negotiator]]’s life is spent haggling about them.
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| Where refusal or inability to perform cannot be proven, actual failure to pay or deliver ends all arguments. If you ''actually'' haven’t performed, it no longer matters ''why''.
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| There is therefore a sort of hierarchy of these events. Actual default is the safest, and most common, default trigger. Bankruptcy is the next — though there is more looseness around some of its limbs, an administrator actually being appointed, or a petition actually being filmed is clean, public and unlikely to prompt many arguments. Default Under Specified Transaction — that transaction being one to which you are directly a party,
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| The remaining events are sketchy and unpopular, depending as they do on private information you most likely won't have about thresholds you can't easily calculate. We may argue till we are hoarse about Cross Default. We will not invoke it.
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| =====Externalities=====
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| There are a category of events which make it impossible even for a solvent counterparty to perform. Change in law, for example — it is not beyond possibility that certain kinds of swaps might be restricted or outlawed altogether<ref>Not long ago the European Union proposed restricting the carbon market to “end users” to discouraged financial speculation, for example. This would have rendered certain forward contracts in {{euaprov|Allowances}} involving delivery to non-users illegal.</ref> or Tax events that make the transaction uneconomic as originally envisaged.
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| Secondary events of this kind — things that limit a delaer’s ability to hedge, or materially increase its costs of doing so, tend not to be Termination Events partly this reflects a fact not often stated, but nonetheless true: there is a price at which the parties will agree to terminate any swap. Just because a party doesn't have an economic option to terminate the trade doesn't mean it can't terminate the trade. It always has an “at market” option. In liquid markets during times of fair weather this is a source of great comfort; in illiquid markets and at times of stress, less so. A dealer will say, “I will always show you a price. You just might not mind the price, is all.”
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| Customers have less incentive to break trades if it means realising
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| {{sa}}
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| *[[The map and the territory]]
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