Specified Transaction - ISDA Provision: Difference between revisions

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{{isdasnap|Specified Transaction Definition}}
{{nman|isda|2002|Specified Transaction}}
==Commentary==
Note the 1992 version excludes actual Transactions under the ISDA itself. This is for the sensible reason that a default under an ISDA Transaction is covered by elsewhere in the ISDA (eg {{isdaprov|Failure to Pay or Deliver}} and {{isdaprov|Breach of Obligation}} concepts, and it might lead to a perverse result if a {{isdaprov|Transaction}} was not otherwise an {{isdaprov|Event of default}} under any ISDA provision but the {{isdaprov|DUST}} provision, however unlikely that may be.
 
The {{2002ma}} expands the basic definition of {{isdaprov|Specified Transaction}} to specifically include [[futures]] [[credit derivatives]], [[repo]], [[stock lending]], weather derivatives, [[NDF]]s, transactions executed under terms of business and other commodities or similar transactions that is presently or in future becomes common in the financial markets.
 
Note {{dust}} doesn't generally pick up contracts in the nature of [[borrowed money]] or [[indebtedness]], because these are picked up under the wider scope of the {{isdaprov|Cross Default}} provision which, of course, applies to indebtedness owed to anyone, not just by your counterparty to you. Still, there is weirdness: {{isdaprov|Cross Default}} contemplates a {{isdaprov|Threshold Amount}} before it can be triggered. {{isdaprov|DUST}} doesn't.  So this leads to an odd gap:
 
A (sub Threshold Amount) default under {{isdaprov|Specified Indebtedness}} ''between the two contractual parties'' would not entitle the innocent party to close out, but a default under any other derivative transaction between them (i.e., as dfefined in {{isdaprov|Specified Transaction}}) ''would'' - even if the value of the payment default was smaller than the default on borrowed money. Kind of counterintuitive.
 
{{isdaanatomy}}
*{{isdaprov|Default under Specified Transaction}}

Latest revision as of 16:28, 14 August 2024

2002 ISDA Master Agreement

A Jolly Contrarian owner’s manual™

Specified Transaction in a Nutshell

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Original text

Specified Transaction” means, subject to the Schedule,

(a) any transaction (including an agreement with respect to any such transaction) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is not a Transaction under this Agreement but
(i) which is a rate swap transaction, swap option, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option, credit protection transaction, credit swap, credit default swap, credit default option, total return swap, credit spread transaction, repurchase transaction, reverse repurchase transaction, buy/sell-back transaction, securities lending transaction, weather index transaction or forward purchase or sale of a security, commodity or other financial instrument or interest (including any option with respect to any of these transactions) or
(ii) which is a type of transaction that is similar to any transaction referred to in clause (i) above that is currently, or in the future becomes, recurrently entered into in the financial markets (including terms and conditions incorporated by reference in such agreement) and which is a forward, swap, future, option or other derivative on one or more rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, economic indices or measures of economic risk or value, or other benchmarks against which payments or deliveries are to be made,
(b) any combination of these transactions and
(c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation.
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: FTPDBreachCSDMisrepDUSTCross DefaultBankruptcyMWA Termination Events: IllegalityFMTax EventTEUMCEUMATE 5 Events of Default: FTPDBreachCSDMisrepDUSTCross DefaultBankruptcyMWA Termination Events: IllegalityTax EventTEUMCEUMATE 5 Events of Default: FTPDBreachCSDMisrepDUSSCross DefaultBankruptcyMWA Termination Events: IllegalityTax EventTEUMCEUM
Early Termination 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculations; Payment DatePayments on ETSet-off 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculationsPayments on ETSet-off 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculationsPayments 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

Resources and Navigation

Index: Click to expand:

Comparisons

A Specified Transaction under the 1992 ISDA is, by the standards of ISDA’s crack drafting squad™, monosyllabic to the point of being terse. But that is as nothing compared to the 1987 ISDA, which wasn’t even called a Specified Transaction, but was just a Specified Swap.

Under the 2002 ISDA, it is expressed with far more of the squad’s signature sense of derring-do and the Byzantine, expanding the basic definition:

Basics

Used in the Default under Specified Transaction Event of Default under Section 5(a)(v) — fondly known to those in the know as “DUST”.

What?

Specified Transactions are those financial markets transactions between you and your counterparty other than those under the present ISDA Master Agreement, default under which justifies the wronged party closing out the present ISDA. “Specified Transactions” therefore specifically exclude Transactions under the ISDA itself for the sensible reason that a default under those is covered by by Failure to Pay or Deliver and Breach of Obligation. It might lead to a perverse result if misadventure under an ISDA Master Agreement Transaction which did not otherwise amount to an Event of Default, became one purely as a result of the DUST provision, however unlikely that may be.

Credit support annexes?

We are going to go out on a limb here and say that little parenthetical “(including an agreement with respect to any such transaction)” is, if not deliberately designed that way, is at least calculated[2] to capture failures under a credit support annex which, yes, is a Transaction under an ISDA Master Agreement but no, is not really a swap or anything really like one.

There is enough chat about Credit Support Providers (yes, yes, the counterparty itself is of course not a Credit Support Provider) to make us think, on a fair, large and liberal interpretation, that a default under the CSA to a swap Transaction is meant to be covered.

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  • JC’s “nutshell” summary of the clause
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    • The odd cognitive dissonance between DUST and Cross Default

See also

References

  1. Oh, look! Anyone remember Enron? Anyone feeling nostalgic for the good old days when men were men, fraud was fraud, financial accountants were profit centres and anything seemed possible? No?
  2. In the sense of being “likely”.