|
|
| (One intermediate revision by the same user not shown) |
| Line 1: |
Line 1: |
| “[[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.
| | ====Cross Acceleration: Cross Default for nice guys==== |
| | {{drop|C|ross acceleration is}} not an ''actual'' ISDA {{{{{1}}}|Event of Default}}, but it is what ''happens'' to {{{{{1}}}|Cross Default}} if only you can persuade your credit department to water it down to something kinder and gentler. {{{{{1}}}|Cross Acceleration}} harks to a world in which people wait for third party [[indebtedness]] to be actually [[accelerated]] before closing out their ISDAs. |
|
| |
|
| ====Cross acceleration: what ''is'' it?====
| | It is only an Event of Default once the Defaulting Party’s third-party lenders have actually [[accelerated]] {{{{{1}}}|Specified Indebtedness}} in an amount exceeding the {{{{{1}}}|Threshold Amount}}. |
| {{cross acceleration capsule}} | |
| ====How to change {{isdaprov|Cross Default}} to {{isdaprov|cross acceleration}} ====
| |
| You can amend {{isdaprov|Cross Default}} to {{isdaprov|Cross Acceleration}} by adding the language in the panel:
| |
| Seems so easy, doesn’t it?
| |
|
| |
|
| {{isdaprov|Cross Default}} is triggered by two kinds of default:
| | That is a much less sensitive trigger — a much ''worse'' trigger, a credit officer might say, but bear with me — and it avoids that weird scenario when the actual [[lender]] has ''not'' itself exercised its default rights, but you have exercised yours, even though your counterparty is still performing your contract to the letter. |
| {{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>
| |
| '''Repayment default''': a borrower’s failure to fulfil, in full, final repayment of the debt itself when due. </ol> | |
|
| |
|
| Why distinguish between them, seeing as both are cataclysmic?
| | Cross acceleration also avoids indeterminacy and nervousness of waiting for [[grace period]]s you might not know about to expire, oral waivers or amendments to the third party contract, granting indulgences for administrative and operational error and all that dreck: if the lender ''has ''actually'' accelerated the loan, [[grace period]]s and operational errors must have expired and therefore no longer matter. It is too late. The game is up. |
| | |
| 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.
| |
| | |
| 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.
| |
| | |
| 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. | |
| | |
| Now, to be sure, [[legal eagles]] might start hopping up and down, flapping their wings and squawking restively at this point.
| |
| | |
| “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!”
| |
| | |
| 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.
| |
| | |
| ====Is “downgrading” to cross acceleration wise?====
| |
| There are two schools of thought: <br>
| |
| {{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>
| |
| {{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.”
| |
| | |
| =====A brief critique of the FT Book about derivatives=====
| |
| This, in our view, rather mischaracterises what is going on.
| |
| {{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 ...”}}
| |
| | |
| But it doesn’t have to ''sue'' your counterparty; just call its debt in.
| |
| | |
| {{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.”}}
| |
| | |
| 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.
| |
| {{quote|“If the third party is your counterparty’s main relationship [[bank]] it may take some time to review its position...”}}
| |
| 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.
| |
| | |
| {{quote|“... and may propose a compromise which does not suit you.”}}
| |
|
| |
| 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?
| |
| {{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.”}}
| |
| 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.
| |
| | |
| 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.
| |
| | |
| So this is angel-on-the-head-of-a-pin stuff indeed.
| |
Cross Acceleration: Cross Default for nice guys
Cross acceleration is not an actual ISDA {{{{{1}}}|Event of Default}}, but it is what happens to {{{{{1}}}|Cross Default}} if only you can persuade your credit department to water it down to something kinder and gentler. {{{{{1}}}|Cross Acceleration}} harks to a world in which people wait for third party indebtedness to be actually accelerated before closing out their ISDAs.
It is only an Event of Default once the Defaulting Party’s third-party lenders have actually accelerated {{{{{1}}}|Specified Indebtedness}} in an amount exceeding the {{{{{1}}}|Threshold Amount}}.
That is a much less sensitive trigger — a much worse trigger, a credit officer might say, but bear with me — and it avoids that weird scenario when the actual lender has not itself exercised its default rights, but you have exercised yours, even though your counterparty is still performing your contract to the letter.
Cross acceleration also avoids indeterminacy and nervousness of waiting for grace periods you might not know about to expire, oral waivers or amendments to the third party contract, granting indulgences for administrative and operational error and all that dreck: if the lender has actually accelerated the loan, grace periods and operational errors must have expired and therefore no longer matter. It is too late. The game is up.