Credit Support Default - ISDA Provision: Difference between revisions

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Latest revision as of 16:55, 14 August 2024

2002 ISDA Master Agreement

A Jolly Contrarian owner’s manual™

5(a)(iii) in a Nutshell

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Original text

5(a)(iii) Credit Support Default.
(1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed;
(2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document, or any security interest granted by such party or such Credit Support Provider to the other party pursuant to any such Credit Support Document, to be in full force and effect for the purpose of this Agreement (in each case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or
(3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf);
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 bit of pedantic flannel found its way into the 2002 ISDA — it captures not just the failure of the Credit Support Document itself, but any security interest granted under it, catering to the legal eagle’s most paranoid fears that a contractual right can have some sort of distinct ontological existence independently from the agreement which gives it breath and enforceable currency in the first place. But otherwise the same.

Basics

Before you even put your hand up: no, a Credit Support Annex between the two counterparties is not a “Credit Support Document”, at least under the English law construct: there it is a “Transaction” under the ISDA Master Agreement that offsets the net mark-to-market value of all the other Transactions, so can’t be a Credit Support Document per se. It is different with a 1994 NY CSA — being a pledge document it is a Credit Support Document, but even there the Users’ Guide cautions against treating a direct swap counterparty as a “Credit Support Provider” — the Credit Support Provider is meant to be a third party: hence references to the party itself defaulting directly under a Credit Support Document.

Therefore, tediously — and we think it was avoiding precisely this tediosity that the Users’ Guide had in mind, but, best-laid plans and all that — there is an ontological difference between the mechanics of close out when it comes to a failure under a New York-law CSA when compared to non-payment under an English-law CSA.

A failure to meet a margin call under an English-law CSA or any of its modern English-law successors is therefore a Failure to Pay or Deliver under Section 5(a)(i) of the actual ISDA Master Agreement; a failure to post under a New York-law CSA is a Section 5(a)(iii) Credit Support Default.

Does this make any difference at all? It may do, if you have negotiated different grace periods under your CSA than those under your ISDA Master Agreement proper.

Now, before you ask why anyone would ever do that, firstly let us say that far stupider things than that happen every freaking day in the negotiation of global markets documentation, and secondly that, for example, grace periods for regulatory initial margin may well be standardised — and dealers may not have the capacity or appetite to negotiate them tightly, given the paper war they will be in in any case — so you can quite easily see 2002 ISDAs with very brief grace periods, and Initial Margin CSDs with longer ones. So won’t this be fun when it comes to closeout.

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See also

References