Qualities of a good ISDA

ISDA Anatomy™ →Go uptown →intro →prem →sa An Allegory of Virtue in Boilerplate (von Sachsen-Rampton, 1935) Index: Click ᐅ to expand: ISDA Navigation See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA. The Varieties of ISDA Experience Subject 2002 (wikitext) 1992 (wikitext) 1987 (wikitext) Preamble Pre Pre Pre Interpretation 1 1 1 Obligns/Payment 2 2 2 Representations 3 3 3 Agreements 4 4 4 EODs & Term Events 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • FM • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUSS • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM Early Termination 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations; Payment Date • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET Transfer 7 7 7 Contractual Currency 8 8 8 Miscellaneous 9 9 9 Offices; Multibranch Parties 10 10 10 Expenses 11 11 11 Notices 12 12 12 Governing Law 13 13 13 Definitions 14 14 14 Schedule Schedule Schedule Schedule Termination Provisions Part 1 Part 1 Part 1 Tax Representations Part 2 Part 2 Part 2 Documents for Delivery Part 3 Part 3 Part 3 Miscellaneous Part 4 Part 4 Part 4 Other Provisions Part 5 Part 5 Part 5 Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

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.

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.

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.

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.

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.

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See also

• The purpose of an ISDA