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| ==Cross Default generally==
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| ===As a standard term in [[master trading agreement|master trading agreements]]===
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| For specific provisions see:
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| *{{isdaprov|Cross Default}} ([[ISDA]])
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| *{{fbfprof|Cross Default}} ([[FBF]])
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| *'''[[Cross Default - GMSLA Provision|Stock lending and repo have no cross default]]''': Neither the {{gmsla}} nor the {{gmra}} have, as standard, either a [[cross default]] or a [[default under specified transaction]] provision. ''[[Cross Default - GMSLA Provision|Unless some bright spark thinks it is a good idea to negotiate one in]].''
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| ===Compare and contrast===
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| *'''[[Default under specified transaction]]''': {{t|DUST}} is ''like'' [[cross default]], but just between you and me, on [[derivative]] transactions and without a {{isdaprov|Threshold Amount}};
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| *'''[[Cross acceleration]]''': like [[cross default]], only for a kinder, gentler world where people wait for [[indebtedness]] to be actually [[accelerated]] before closing out their exposures.
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| ==History==
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| ===[[Cross default]] in the [[loan]] market===
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| [[Cross default]] developed in the loan market. If a [[lender]] advanced a large sum to a [[borrower]] with only periodic interest or principal repayments, there would be long periods — months; quarters; even ''years'' — where the borrower was not scheduled to make any payments to the lender at all.
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| Now a borrower that is not due to pay anything, can hardly [[Failure to pay|fail to pay]].
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| This presented our lender with a risk: if, in the meantime, the borrower failed to pay under a loan from ''another'' lender, ''our'' lender would be in a difficult spot: it has good reason to think the borrower is in trouble, but the borrower hasn’t missed any payments. (How could it? ''None were due''.) Waiting for the next payment to see if the borrower will pay won’t do. Our borrower wants to accelerate its loan ''now'' — while the going is still tolerably good.
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| Whence came the notion of a [[cross default]]: ''If you default under a loan you have borrowed from someone else, you default under your [[loan]] with me.''
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| But this is a drastic measure. It means the borrower and its various lenders are in a Mexican stand-off: The lenders will all tend to be trigger happy: they will want to accelerate before some other blighter does. Therefore some thresholds were put around it: The size of the loan being defaulted on would need to be material enough to threaten the borrower’s very solvency.
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| Note the key vulnerabilities that [[cross default]] clause is designed to protect against:
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| *'''Material indebtedness''': Our lender has significant credit exposure to the borrower;
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| *'''Infrequent payments''': Our lender is owed infrequent payment obligations and cannot necessarily rely on a [[failure to pay]].
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| *'''Material default''': The borrower has taken on ''other'' indebtedness in a size big enough to threaten its own viability.
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| ==={{isdaprov|Cross default}} in the {{isdama}}===
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| In their infinite wisdom (or jest), the framers of the [[1987 ISDA Interest Rate and Currency Exchange Agreement]] ([[cro-magnon man]] to the {{2002ma}}’s metropolitan hipster) thought it wise to include a [[cross default]], perhaps because, in those pioneering days, [[Credit Support Annex|credit support annexes]] weren’t run-of-the-mill, and may not even have been invented.
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| Subsequent generations of [[Mediocre lawyer|derivative lawyers]], being the creatures of habit they are, especially when sequestered into an [[ISDA working group]], never thought to take it out, and even our artisanal coffee-swilling {{2002ma}} boasts a tedious {{isdaprov|Cross Default}} provision, an embarrassing relic of its bogan parentage. It’s like that tattoo you got when you were a drunk, but physically attractive, 19 year-old.
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| You see the thing is, for a derivative [[master agreement]], [[cross default]] is a complete nonsense.
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| A counterparty to an {{isdama}}, particularly one with a zero-threshold daily {{isdaprov|CSA}} and many {{isdaprov|transaction}}s under it, suffers none of those weaknesses it is designed for:
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| *'''Little indebtedness''': An {{isdama}} is not a contract of [[indebtedness]], and any [[mark-to-market]] exposure that may ''resemble'' indebtedness is zeroed daily by means of a collateral call;
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| *'''Frequent payments''': particularly where there are many transactions, or where the net mark-to-market position is shifting, there are payment obligations flowing every day, ''and if there are not that means there is no net indebtedness at all to the counterparty''.
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| Additionally, regulated [[credit institution]]s have (or should have) enormous concerns about giving away cross default, because it can affect their liquidity buffer calculations.
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| Yet still we persist in our sophistry.
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| ===Then the [[lawyer|lawyers]] and [[credit officer|credit officers]] start fiddling with things===
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| Cross default is a bad enough idea in a [[derivatives]] [[master agreement]] in the first place, before [[risk managers]] start having a go at it. Misguided things they can do include the following:
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| *Widening it to include default under agreements which aren’t in the nature of [[indebtedness]]: for example, [[derivatives]], or even “any payment obligation”.
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| :*This is problematic because of the accretive nature of the threshold: A single technical or operational failure may mean one is technically in default on payments which, if aggregated, could quickly exceed even a large threshold (especially in a heavily traded derivative master agreement).
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| *Not, in the case of banks, excluding [[deposit|retail deposits]], where operational failure or even governmental action (like a moratorium or currency controls) could lead to technical default on a large amount of indebtedness. (Bank deposits are a form of indebtedness, and will almost certainly be a significant source of indebtedness for any trading bank).
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| *Adding in [[grace period]]s or other preconditions, excuses, permission to skip PE class and so on, before a party may invoke a [[cross default]];
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| *Arguing the toss about [[threshold amount]]s (should it be shareholders funds or cash? or both? lower or higher of? Is my threshold higher than yours? Is it too big? Is it too small? Does my {{isdaprov|Threshold Amount}} look big in this? Honestly it is so tedious).
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| ==Introduction==
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| A cross default provision in an agreement allows a [[non-defaulting party]], on a [[default]] by the other party under any separate contract it may have entered for [[borrowed money]], to [[close out]] the agreement containing the cross default provision. Compare this with:
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| *a [[cross acceleration]] provision, where the lender of the [[borrowed money]] must actually have taken steps to accelerate the [[borrowed money]] as a result of the default before the default becomes available as a termination right under the first agreement; and
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| * [[default under specified transaction]] which references default under financial contracts which do '''not''' represent indebtedness, but only as between the two counterparties to the present contract.
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| Cross default is potentially a very damaging clause, as this picture to the right amply illustrates. Or would do, if there were a picture to the right. To the extent it doesn’t:
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| ===Cross default===
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| A cross default right effectively imports into the [[ISDA]] all the default termination rights under any {{isdaprov|Specified Indebtedness}} owed by a party:
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| *It dramatically (and indeterminately) widens the definition of {{isdaprov|Event of Default}}.
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| *It entitles a [[Counterparty]] to [[cross accelerate|accelerate]] the [[ISDA}} whether or not the {{isdaprov|Specified Indebtedness]] itself has been accelerated.
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| *Depending on the market value of the {{isdaprov|transaction}}s under the ISDA it may cause an immediate capital outflow (though is less likely to in these days of compulsory variation margin).
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| ==={{isdaprov|Specified Indebtedness}}===
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| {{isdaprov|Specified Indebtedness}} means, generally, any [[borrowed money|borrowings]] that, in aggregate, exceed a designated {{isdaprov|Threshold Amount}}. Because of the aggregation right, even comparatively trivial agreements can trigger the provision where they are relatively homogenous and affected by the same local circumstances (for example, [[retail deposit]]s). A low {{isdaprov|Threshold Amount}}, therefore, presents three challenges:
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| *It allows a more varied (and difficult to monitor) range of potential termination rights, because a greater number of agreements will qualify as {{isdaprov|Specified Indebtedness}}.
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| *It “lowers the bar” so failures to comply with comparatively trivial financial commitments could be aggregated to trigger the {{isdaprov|Cross Default}}.
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| *By not excluding [[bank deposit]]s, it raises the possibility of being triggered by localised events unrelated to a bank counterparty’s creditworthiness (for example, political action in a single jurisdiction which affects the bank's ability to pay on its local deposits)
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| *Note that [[repo]] is not considered {{isdaprov|Specified Indebtedness}}: see [[borrowed money]]. But don’t let your inner anal retentive amending the definition in your {{isdaprov|Schedule}} so that it is (even though [[repo]] is more properly dealt with by {{isdaprov|DUST}}).
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| ====[[Derivatives]] as {{isdaprov|Specified Indebtedness}}====
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| Be wary of including [[derivatives]] or other non-debt-like money payment obligations in the definition of {{isdaprov|Specified Indebtedness}}, no matter how high a {{isdaprov|Threshold Amount}}. We would say ''never'' do it, but the wise minds of the [[credit department]] may well be beyond your calming influence, so you may not have a choice. But if you have a choice, don’t do it.
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| In its unadulterated formulation, {{isdaprov|Cross Default}} aggregates up all {{isdaprov|Transaction}}-level defaults, so even though a single {{isdama}} would be unlikely to have a ''net'' [[out-of-the-money]] [[MTM]] of anywhere near the {{isdaprov|Threshold Amount}}, a large number of individual {{isdaprov|Transaction}} [[MTM]]s, if aggregated, may — particularly if you’re selective about which {{isdaprov|Transaction}}s you’re counting — ''which {{isdaprov|Cross Default}} entitles you to be''.
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| Thus, where you have a large number of small failures, you can still have a big problem. (This is why [[bank]]s should also [[carve out]] [[deposit]]s: [[Operational error|operational failure]] or regulatory action can create an immediate problem).
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| Now it is true that you can require the {{isdaprov|Specified Indebtedness}} of a [[master trading agreement]] to be calculated by reference to its net close-out amount, but this only really points up the imbalance between buy-side and sell-side. Sure, fund managers may have fifty or even a hundred {{isdama}}s, but they will be split across dozens of different funds., each a different entity with its own {{isdaprov|Threshold Amount}}. [[Broker dealer|Broker-dealer]]s, on the other hand, will have literally ''hundreds of thousands of [[master agreement]]s, all facing the same legal entity''. Credit dudes: ''you are the wrong side of this risk, fellas''.
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| Now seeing as most [[master trading agreement]]s are fully collateralised, and so don’t represent material [[indebtedness]] on a netted basis anyway, it may be that even with hundreds of thousands of the blighters, no-one’s {{isdaprov|Threshold Amount}} will ever be seriously threatened. But if no {{isdaprov|Threshold Amount}} is ever at risk from an {{isdama}}, then ''why are you including the {{isdama}} in {{isdaprov|Specified Indebtedness}} in the first place?''
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| O tempora. O [[paradox]]. <br>
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| ===Credit Mitigation===
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| Cross Default is intended to be a tool for mitigating credit exposure. It should be set at a level which reflects a material credit concern in the context of the entire enterprise. By convention, the market generally imposes a Threshold Amount equating to between 2 and 3 percent of shareholders’ funds.
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| ===Credit Support Annex===
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| There are other ways of mitigating credit exposure (such as a zero threshold {{csa}}). If a Counterparty's positive [[mark-to-market|exposure]] to {{Bank}} will be fully collateralised on a daily basis, meaning its overall exposure to {{Bank}} at any time will be intra-day movement in the net derivatives positions (a failure to post collateral itself is grounds for immediate termination).
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| ===Contagion risk===
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| It is important to maintain minimum standards which are reflective of genuine credit concerns against the bank so as to limit a “[[snowball effect|snowball]]” effect: were we to allow a £50mm {{isdaprov|Threshold Amount}}, we would potentially be open to a large number of derivative counterparties simultaneously (and opportunistically) closing out [[out-of-the-money]] derivatives positions, which in itself could have massive liquidity and capital implications.
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| ==Cross Acceleration==
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| “[[Cross acceleration]]” is not an ''actual'' ISDA {{isdaprov|Event of Default}}, but it is what ''happens'' to an actual ISDA {{isdaprov|Event of Default}} — namely, the much-negotiated, seldom-used Section {{isdaprov|5(a)(vi)}}, {{isdaprov|Cross Default}}, if you can persuade your [[credit department]] to water it down to something sensible.
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| ====Cross acceleration: what ''is'' it?====
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| {{cross acceleration capsule}}
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| ====How to change {{isdaprov|Cross Default}} to {{isdaprov|cross acceleration}} ====
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| You can amend {{isdaprov|Cross Default}} to {{isdaprov|Cross Acceleration}} by adding the language in the panel:
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| Seems so easy, doesn’t it?
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| {{isdaprov|Cross Default}} is triggered by two kinds of default:
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| {{L1}}'''General default''': a general [[event of default]] of any kind at any time during the tenor of any {{isdaprov|Specified Indebtedness}} — this could be anything: the borrower’s bankruptcy, a breach of its reps and warranties, a non-payment of interest, any [[repudiatory breach]] of the contract of indebtedness, really; or <li>
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| '''Repayment default''': a borrower’s failure to fulfil, in full, final repayment of the debt itself when due. </ol>
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| Why distinguish between them, seeing as both are cataclysmic?
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| There is an answer, but it is fussy, word-smithy stuff: because a ''general'' default entitles the lender to ''accelerate'' the debt requiring the borrower to repay it at once, before its scheduled maturity date; a repayment default, logically, falls ''on'' that scheduled maturity date, and so can’t be “[[accelerated]]” as such. There ''is'' nothing to “accelerate”: our destination, the repayment date, is already here.
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| Therefore to convert a [[cross default]] to a [[cross acceleration]], you only need to require ''general'' defaults to have been accelerated. Repayment defaults ''can’t'' be accelerated.
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| Cross acceleration also avoids the need to muck around waiting for [[grace period]]s to expire, granting indulgences for administrative and operational error and all that dreck: if the counterparty ''has ''actually'' accelerated the loan, the [[grace period]]s and operational errors no longer matter. It is too late. The game is up.
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| Now, to be sure, [[legal eagles]] might start hopping up and down, flapping their wings and squawking restively at this point.
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| “But,” they will say, “what about [[grace period]]s and operational errors on that final payment? We must be allowed those before you can close out!”
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| The short answer is that ''ordinary'' [[grace period]]s ''are'' factored in — the event isn’t triggered until they have all expired. As for affordances that don’t quite count as [[grace period]]s (for example, concessions allowing a borrower to provide evidence of [[operational error]], giving it some more time to pay) — well, on a [[fair, large and liberal]] view these count as [[grace period]]s anyway.
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| ====Is “downgrading” to cross acceleration wise?====
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| There are two schools of thought: <br>
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| {{drop|Y|es}}: The sensible, pragmatic, wise, [[noble, fearless and brave]] one you will find in these pages: “''Yes''. [[Cross default]] is misplaced in a modern daily-collateralised {{isda}}. Anything you can do either to restrict its scope, or simply to avoid being dragged into a [[tedious]] argument ''about'' its scope, is worth doing.” <br>
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| {{drop|N|o}}: The learned one, from the learned author of that terrible [[FT book about derivatives]]: “All other things being equal, ''no''. One should only soften [[cross default]] reluctantly. Because other counterparts might not be so weak.”
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| =====A brief critique of the FT Book about derivatives=====
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| This, in our view, rather mischaracterises what is going on.
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| {{quote|“With [[cross acceleration]] the innocent third party actually has to start proceedings against the defaulting counterparty before you can trigger your transaction termination rights ...”}}
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| But it doesn’t have to ''sue'' your counterparty; just call its debt in.
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| {{quote|“The downgrading ''[of cross-default to cross acceleration]'' therefore affects the timing of your right to terminate, It is no longer automatic but deferred.”}}
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| We don’t know what the learned author means by “automatic”: either way, the termination right is ''optional'', not ''automatic'', but in either case, it is contingent on a different independent event: in one case, the more nebulous “default”; in the other, a lender’s quite hard-edged ''acceleration'' ''following'' the default.
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| {{quote|“If the third party is your counterparty’s main relationship [[bank]] it may take some time to review its position...”}}
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| Indeed it may, and probably will. ''But while it is doing that it is not accelerating its claim against your counterparty.'' It is granting its customer, and your counterparty, an indulgence. ''Your'' position is, therefore, not worsened in the meantime.
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| {{quote|“... and may propose a compromise which does not suit you.”}}
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| You, bear in mind, are the owner of a fully collateralised {{isdama}} which the counterparty has, in the meantime, continued faithfully to perform. If one of your co-creditors has granted an indulgence on outstanding indebtedness — even in return for some other surety or compromise — which avoid that debt being accelerated in full, how can that by itself make your position worse?
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| {{quote|“I believe such downgrade requests should only be considered favourably if specific foreseeable circumstances justify them [...] or if your counterparty gives written confirmation that cross acceleration applies to all its agreements and will do so in the future. This is because if even one counterparty has {{isdaprov|Cross Default}} it would be in pole position to trigger its termination rights.”}}
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| On this last point, the learned author is, technically, correct: you are marginally worse off if you have conceded [[cross acceleration]] and other swap counterparties have not. They can beat you, and your counterparty’s main relationship bank, to the punch, assuming they are cowboys who view a [[relationship contract]] like an {{isdama}} as something that it should be a race to close out. Brokers that the [[JC]] knows don’t tend to think that way. They have compliance officers who will quail at the thought of not treating their customers fairly. In any case, the fact that this ''could'' happen ''just illustrates how stupid the concept of cross-default is''. ''Especially'' in our enlightened age of zero-threshold, [[variation margin|daily margined]] non-exotic swap contracts. ''Especially'' given the extreme conceptual difficulty of even gathering enough information to work out whether you even ''can'' exercise your stupid [[cross default]] right.
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| Just how a third party would ever be able to assess the value of defaulted {{isdaprov|Specified Indebtedness}} has never been explained to this old goat.
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| So this is angel-on-the-head-of-a-pin stuff indeed.
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| ==Basic==
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| {{{{{1}}}|Cross Default}} is intended to cover the unique risks associated with ''lending money to counterparties who have also borrowed heavily from other people''.
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| Now, if — as starry-eyed young [[credit officer]]s in the thrall of the moment are apt to — you apply this thinking to contractual relationships which ''aren’t'' “[[term loan]]y” in nature — that is, that don’t have long spells where one party is deeply in the hole to the other, with not so much as interest payment due for months whose failure could trigger any acceleration — it will give you trouble. We go into this more in the premium JC.
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| =====Specified Indebtedness=====
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| {{quote|{{ISDA Master Agreement {{{2}}} Specified Indebtedness}}}}
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| {{{{{1}}}|Specified Indebtedness}} is generally any [[borrowed money|money borrowed]] from any third party (e.g. bank debt; [[deposits]], loan facilities etc.). Some parties will try to widen this: do your best to resist the temptation. Again, more details on why in the premium section.
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| ====={{isdaprov|Threshold Amount}}=====
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| The {{isdaprov|Threshold Amount}} is a key feature of the {{isdaprov|Cross Default}} {{isdaprov|Event of Default}} in the {{isdama}}. It is the level over which accumulated [[indebtedness]] defaults comprise an {{isdaprov|Event of Default}}. It is usually defined as a [[cash]] amount or a percentage of [[Tier 1 capital|shareholder funds]], or both, in which case — [[Trick for young players|schoolboy error]] hazard alert — be careful to say whether it is the greater or lesser of the two.
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| Because of the [[snowball effect]] that a [[cross default]] clause can have on a party’s insolvency it should be big: like, [[bankruptcy|life-threateningly]] big — because the consequences of triggering a {{isdaprov|Cross Default}} are dire, and it may create its own chain reaction beyond the ISDA itself. So expect to see, against a [[swap dealer]], 2-3% of shareholder funds, or sums in the order of hundreds of millions of dollars. For [[end users]] the number may well be a lot lower (especially for thinly capitalised investment vehicles like [[Hedge fund|fund]]s — like, ten million dollars or so — and, of course, will key off [[NAV]], not shareholder funds.
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| =====[[Cross acceleration]]=====
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| For those [[noble, fearless and brave]] folk who think {{{{{1}}}|Cross Default}} is a bit ''gauche''; a bit passé in these enlightened times of zero-threshold [[VM CSA]]s<ref>Your correspondent is one of them; the author of that terrible [[FT book about derivatives]] is not.</ref> but can’t quite persuade their [[credit department]] to abandon {{{{{1}}}|Cross Default}} altogether — a day I swear is coming, even if it is not yet here — one can quickly convert a dangerous {{{{{1}}}|Cross Default}} clause into a less nocuous (but still ''fairly'' nocuous, if you ask me — nocuous, and yet strangely pointless) [[cross acceleration]] clause — meaning your close-out right that is only available where the lender in question has ''actually'' [[accelerated]] its {{{{{1}}}|Specified Indebtedness}}, not just become able to accelerate it, with some fairly simple edits, which are discussed in tedious detail [[Cross Acceleration - ISDA Provision|here]].
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| ==Premium==
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| =====On the danger to dealers of Cross Default=====
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| Under the {{isdama}}, default by a swap counterparty on “{{{{{1}}}|Specified Indebtedness}}” — we will come to that, but generally it refers to “borrowed money” — owed to a third party in an amount above the “{{{{{1}}}|Threshold Amount}}” is an {{{{{1}}}|Event of Default}} under the {{isdama}}, even though the {{{{{1}}}|Defaulting Party}} might be fully up to date with all its covenants under the {{isdama}} itself.
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| {{{{{1}}}|Cross Default}} thus imports the default rights from some contract the counterparty has agreed with some third party random — in fact ''all'' default rights it has given away to ''any'' third party randoms, as long as they add up to the {{{{{1}}}|Threshold Amount}} — into the present {{isdama}}. For example, if you breach a financial covenant in your [[revolving credit facility]] with your bank, an entirely unrelated [[swap dealer]] could close you out, even though you weren’t otherwise in default under the dealer’s ISDA, and ''even though your bank lender didn’t accelerate your [[RCF]]''.
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| This ought to strike a fair-minded person as pretty startling. For reasons the JC has not yet been able to fathom, it typically does ''not'' strike [[credit officer]]s as pretty startling. They tend to think it is pretty groovy.
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| It might, indeed, seem quite groovy at first glance. Especially to a [[swap dealer]]’s [[credit officer]]. But this is to overlook the fact that, unlike the [[covenant]]s in a revolving credit facility, which all point, like an arsenal of warheads, in one direction only — the customer’s — {{{{{1}}}|Cross Default}} in an ISDA is a ''bilateral'' obligation. It can bite ''the dealer'' just as brutally as it can the customer.
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| The cross-default concept grew out of ordinary bank lending. There is a [[lender]] and a [[borrower]], and the [[borrower]] gets ''null points'' in the cross-default department against the lender. The [[First Men]], framers of the pioneering swap market, borrowed it, at the time not really knowing any better, but presuming that — since swap contracts are bilateral, right?<ref>It is the JC’s unfashionable view that [[A swap as a loan|they are not]], in any meaningful sense.</ref> — the cross default event should cut both ways. But the {{isdama}} is not, from a customers’ perspective, a lending contract. Especially not now everything is, by regulation, daily [[Variation margin|margined]] to a zero threshold. ''There is no material [[indebtedness]]''.
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| So, if you are a swap dealer, the boon of having a {{{{{1}}}|Cross Default}} against your counterparty — which might not have a lot of public indebtedness — may be a lot smaller than the bane of having given away a {{{{{1}}}|Cross Default}} against yourself. Because you have a ''ton'' of public indebtedness.
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| {{{{{1}}}|Cross Default}} is, therefore, theoretically at least, a very dangerous provision. [[Financial reporting]] dudes — some more than others, in the [[JC]]’s experience — get quite worked up about it. Yet, it is very rarely triggered:<ref>That is to say, it is practically useless.</ref> it is inherently nebulous. [[Credit officer]]s disdain nebulosity and, rightly, will always prefer to act on a clean {{{{{1}}}|Failure to Pay}} or {{{{{1}}}|Bankruptcy}}. Generally, if you have a daily-margined {{isdama}}, one of those will be along soon enough. And if it isn’t — well, what are you worrying about?
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| “Okay, so why even ''is'' there a {{{{{1}}}|Cross Default}} in the {{isdama}}?” ''Great'' question. Go ask {{icds}}. The best [[JC|I]] can figure is that, when the [[Children of the Forest]] first invented the [[eye-ess-dee-aye]] back in those primordial times, back in the 1980s, swaps were new, they hadn’t really thought them through, no-one realised how the market would explode<ref>Ahhh, sometimes ''literally''.</ref> and in any case, folks back then held lots of opinions we would now regard as quaint. I mean, just look at the music they — okay, ''we''<ref>I am indebted to my good friend Mr. V.C.S., who writes to point out that some of us ''still'' listen to that kind of music. All About Eve were misunderstood geniuses I tell you.</ref> — listened to.
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| =====The Threshold Amount=====
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| ======{{1992ma}}======
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| This contemplates default “in an aggregate '''amount'''” exceeding the {{isda92prov|Threshold Amount}} which would justify early termination of the {{isda92prov|Specified Indebtedness}}: that is to say, the value of the failed payment, and not the whole principal amount of the {{isda92prov|Specified Indebtedness}} it was owed under, contributes to the {{isda92prov|Threshold Amount}}.
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| ======{{2002ma}}======
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| This contemplates an [[event of default]] under agreements whose “'''aggregate principal amount'''” is greater than the Threshold Amount: that is to say it is the ''whole principal amount'' of the agreement which is picked up, not just the amount of the payment. This change, we speculate, is meant to fix a howler of a drafting lapse from {{icds}}. 2002’s {{isdaprov|Cross Default}} can be triggered by ''any'' [[event of default]], not just a payment default, whereas the {{1992ma}}’s requirement for “an {{isda92prov|Event of Default}} ... ''in an amount equal to...''” impliedly limited the clause to ''payment'' defaults only since other defaults — failure to provide annual reports and so on — would not be “in an amount” of anything).
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| Lastly, it captures the whole value of the {{{{{1}}}|Specified Indebtedness}} that has been defaulted on, not just the value of the payment default itself (allowing for a moment that it even ''is'' a payment capable of being valued — see above).
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| {{quote|Example: if you defaulted on a small interest payment on your loan that nonetheless entitled the lender to accelerate the whole loan, under the {{1992ma}} you could only count the value of the actually missed payment to your {{{{{1}}}|Threshold Amount}}, even though the whole loan was at risk of being accelerated. That is to say, a failed interest payment, even in a small amount, can be a much more significant credit deterioration than is implied by the value of the missed payment. }}
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| =====Specified Indebtedness=====
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| ======Derivatives======
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| This is all presuming you leave the definition of Specified Indebtedness to capture things that resemble actual borrowings. If you are cavalier enough to include ''non-debt-like'' payments — things like, for example, swaps — you've bought yourself a wild old ride anyway. AS WE SHALL EXPLAIN.
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| For reasons best known to themselves, credit officers from perennially accident-prone continental banks are especially prone to this sort of thing. The JC once tried to warn them. He was told, not for the first time, to “mind his own jolly business”. So he did. You are reading the result.
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| In any case, be wary of including [[derivatives]] or other non-debt-like money payment obligations in the definition of Specified Indebtedness, no matter how high a {{{{{1}}}|Threshold Amount}}. We would say ''never'' do it, but the wise minds of the [[credit department]] may well be beyond your calming influence, so you may not have a choice. But if you have a choice, don’t do it.
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| In its unadulterated formulation, {{{{{1}}}|Cross Default}} aggregates up all {{{{{1}}}|Transaction}}-level defaults, so even though a single {{isdama}} would be unlikely to have a ''net'' [[out-of-the-money]] [[MTM]] of anywhere near the {{{{{1}}}|Threshold Amount}}, a large number of individual {{{{{1}}}|Transaction}} [[MTM]]s, if aggregated, may — particularly if you’re selective about which {{{{{1}}}|Transaction}}s you’re counting — ''which {{{{{1}}}|Cross Default}} entitles you to be''.
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| Thus, where you have a large number of small failures, you can still have a big problem. (This is why [[bank]]s should also [[carve out]] [[deposit]]s: [[Operational error|operational failure]] or regulatory action can create an immediate problem).
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| Now it is true that you can require the Specified Indebtedness of a [[master trading agreement]] to be calculated by reference to its net close-out amount, but this only really points up the imbalance between buy-side and sell-side. Sure, fund managers may have fifty or even a hundred {{isdama}}s, but they will be split across dozens of different funds., each a different entity with its own {{{{{1}}}|Threshold Amount}}. [[Broker dealer|Broker-dealer]]s, on the other hand, will have literally ''hundreds of thousands of [[master agreement]]s, all facing the same legal entity''. Credit dudes: ''you are the wrong side of this risk, fellas''.
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| Now, seeing as most [[master trading agreement]]s are fully collateralised, and so don’t represent material [[indebtedness]] on a netted basis anyway, it may be that even with hundreds of thousands of the blighters, no-one’s {{{{{1}}}|Threshold Amount}} will ever be seriously threatened.
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| But if no {{{{{1}}}|Threshold Amount}} is ever at risk, then ''why are you including the ISDA in Specified Indebtedness in the first place?''
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| O Tempora. O [[Paradox]].
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| ======Stock loans and repo======
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| In any case, what should one make of “[[borrowed money]]”? Could it include [[repo]] and [[stock loan]] obligations under [[securities financing transaction]]s? Amounts owed to trade creditors? (In each case no, according to Simon Firth - see [[borrowed money|here]]).
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| ======Initial margin======
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| What of a failure to pay an {{csaprov|Independent Amount}}? Technically this is ''not'' a payment of [[indebtedness]], and if the [[IM]] payer is up-to-date on [[variation margin]] payments, there may not be any [[indebtedness]] at all. Indeed, once the [[IM]] payer has paid required [[IM]], the [[IM]] ''receiver'' becomes indebted to the ''payer'' for the return of the [[initial margin]] — so while it certainly comprises a [[failure to pay]] when due, the value of the {{{{{1}}}|Specified Indebtedness}} that failure contributes to the {{{{{1}}}|Threshold Amount}} might be nil, or even ''negative''. This, your risk people will say, is ''why'' one should widen {{{{{1}}}|Specified Indebtedness}} to include ''all'' payment obligations, but that, for a host of reasons just explained, is whopping great ''canard a l’orange'' in [[Jolly Contrarian|this old contrarian’s]] opinion.
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| =====DUST v Cross Default=====
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| A cut-out-and-keep guide to the difference between {{{{{1}}}|Default Under Specified Transaction}} and {{{{{1}}}|Cross Default}} at the {{{{{1}}}|DUST}} page,
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