Long-form confirmation: Difference between revisions
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{{a|isda|}}A [[long form confirmation]], or “''' | {{a|isda|}}A [[long-form confirmation]], or “'''[[LFC]]'''”, generally refers to the documentation for a financial transaction between two parties which have not (yet) formally signed a [[master agreement]] for that type of transaction. Instead they document the trade on a “long form” which [[Deem|deems]] into existence between the parties a basic version of the appropriate master agreement for the purposes of the specific transaction. | ||
This used to be totally cool, if slightly unwieldy — there is inevitably more text in an LFC, and you have to elect and designate tiresome things that the master agreement is designed to do away with — but if you only expect to do a single trade it heads off quote a bit of the brain damage that comes with negotiating a full-blown ISDA. | |||
However, over the years the sober and upright legal fraternity increasingly began to frown on this contrivance. By 2008 that frown had transformed into a red-faced, capillary-bursting glower and in the aftermath of the [[global financial crisis]] the idea of a [[long form confirmation became unmentionable, notwithstanding the fact that [[LFC]]s didn’t really have anything to do with the near total meltdown of the financial system. The LFC is now shunned, marginalised and cast out to the fringes of polite financial society. Particularly popular among lazy pulp [[Finance fiction|fi-fi]] hacks like [[Hunter Barkley]] (he of the [[Opco Boone]] series), it frequently features as a McGuffin in the [[Finance Fiction]] canon and, when we get around to it, will feature in our [[Long form confirmation - FWMD|FWMD Top Trumps]] catalog. | |||
====Example: ISDA LFC==== | ====Example: ISDA LFC==== | ||
For example, an | For example, an [[ISDA}} [[LFC}} incorporates by reference the {{isdama}}, without a {{isdaprov|Schedule]], pulling in the provisions in the {{isdama]] concerning termination and close-out, representations, so on. So, you have an ISDA without all the bother, right? | ||
In hindsight, a revolutionary idea, whose time will once again come, we think. But for the time being the [[Onboarding|cottage industrial complex]] of the ISDA negotiation world holds off the baying hounds of common sense, and we are going through the pantomime of separately negotiating what ought to be an utterly standard market contract. | |||
====Drawbacks==== | ====Drawbacks==== | ||
While | While [[LFC]]s “do the job”, they’re considered “not ideal” for a number of reasons. | ||
=====Credit protections===== | |||
While they incorporate the basic ISDA protections which are in the pre-printed {{isdama}}. However, most swap participants these days — especially [[sell-side]] swap dealers — significantly enhance these protections with additional provisions and elections in the {{isdaprov|Schedule}}. | |||
There are those that say the general protections in the ISDA are, for the most part, perfectly adequate to manage the credit risk of a swap agreement (the vast majority of all ISDAs that fail are closed out for {{isdaprov|Failure to Pay or Deliver}} and {{isdaprov|Bankruptcy}}, and not the more exotic concoctions in the {{isdaprov|Schedule}}), and where you are only planning one or two transactions — usually the presumption where there is talk of an LFC, the enhanced protections are even less likely to come into play. | |||
=====Credit Support===== | |||
Secondly, a LFC does not naturally lend itself to a Credit Support Annex for posting collateral. This is particularly true for the English law {{csa}} and its spiritual successors, which are framed themselves as independent {{isdaprov|Transaction}}s to be offset and netted down against the net exposure of the live transactions under the, well, master agreement. LFCs don’t do netting. (see netting below). But on the other hand, there are a range of Transactions where collateral still is not necessary or common (ore-paid options, Transactions hedging limited recourse repackaging structures and so on), and netting is not required, or is even undesirable. An LFC would be fine for these Transactions. | |||
=====Cross-transactional netting===== | |||
The standard LFC deems each separate transaction to be executed under a “stand-alone” {{isdama}}. Without fiddly additional amendments — importing much of the the heavy machinery of Sections {{isdaprov|2(a)(iii)}}, {{isdaprov|5}} and {{isdaprov|6}} — it would be hard to make an LFC “net”. That said, there is some “aggregation language” in every LFC, and every LFC has the same designated {{isdaprov|Termination Currency}} — but this may not pass muster for a swap dealer requiring full-blown netting recognition for regulatory capital calculations). Again, if you are executing single transactions where there is nothing to net, if all your transactions are the same way risk (e.g., where a customer is only buying pre-paid calls and puts), or if you absolutely ''do not want'' to allow cross-Transaction netting (as in the case of a Repackaging SPV, where transactions relating to different Series are contractually ring-fenced from each other and should never consolidate) then again an LFC might be a sensible option. | |||
====An format whose time may yet return?==== | |||
The JC pines for the old LFCs. Clearly full-blown masters have their place for busy end-users trading a variety of risks against dealers. But the LFC has its place, and may help take smaller, less sophisticated users outside the minefield of full ISDA onboarding. | |||
{{sa}} | {{sa}} | ||
*[[FWMD Top Trumps]] | *[[FWMD Top Trumps]] | ||
*[[The purpose of an ISDA]] | |||
*[[Repackaging]] | |||
Latest revision as of 11:46, 13 August 2024
A long-form confirmation, or “LFC”, generally refers to the documentation for a financial transaction between two parties which have not (yet) formally signed a master agreement for that type of transaction. Instead they document the trade on a “long form” which deems into existence between the parties a basic version of the appropriate master agreement for the purposes of the specific transaction.
This used to be totally cool, if slightly unwieldy — there is inevitably more text in an LFC, and you have to elect and designate tiresome things that the master agreement is designed to do away with — but if you only expect to do a single trade it heads off quote a bit of the brain damage that comes with negotiating a full-blown ISDA.
However, over the years the sober and upright legal fraternity increasingly began to frown on this contrivance. By 2008 that frown had transformed into a red-faced, capillary-bursting glower and in the aftermath of the global financial crisis the idea of a [[long form confirmation became unmentionable, notwithstanding the fact that LFCs didn’t really have anything to do with the near total meltdown of the financial system. The LFC is now shunned, marginalised and cast out to the fringes of polite financial society. Particularly popular among lazy pulp fi-fi hacks like Hunter Barkley (he of the Opco Boone series), it frequently features as a McGuffin in the Finance Fiction canon and, when we get around to it, will feature in our FWMD Top Trumps catalog.
Example: ISDA LFC
For example, an [[ISDA}} [[LFC}} incorporates by reference the ISDA Master Agreement, without a {{isdaprov|Schedule]], pulling in the provisions in the {{isdama]] concerning termination and close-out, representations, so on. So, you have an ISDA without all the bother, right?
In hindsight, a revolutionary idea, whose time will once again come, we think. But for the time being the cottage industrial complex of the ISDA negotiation world holds off the baying hounds of common sense, and we are going through the pantomime of separately negotiating what ought to be an utterly standard market contract.
Drawbacks
While LFCs “do the job”, they’re considered “not ideal” for a number of reasons.
Credit protections
While they incorporate the basic ISDA protections which are in the pre-printed ISDA Master Agreement. However, most swap participants these days — especially sell-side swap dealers — significantly enhance these protections with additional provisions and elections in the Schedule.
There are those that say the general protections in the ISDA are, for the most part, perfectly adequate to manage the credit risk of a swap agreement (the vast majority of all ISDAs that fail are closed out for Failure to Pay or Deliver and Bankruptcy, and not the more exotic concoctions in the Schedule), and where you are only planning one or two transactions — usually the presumption where there is talk of an LFC, the enhanced protections are even less likely to come into play.
Credit Support
Secondly, a LFC does not naturally lend itself to a Credit Support Annex for posting collateral. This is particularly true for the English law 1995 CSA and its spiritual successors, which are framed themselves as independent Transactions to be offset and netted down against the net exposure of the live transactions under the, well, master agreement. LFCs don’t do netting. (see netting below). But on the other hand, there are a range of Transactions where collateral still is not necessary or common (ore-paid options, Transactions hedging limited recourse repackaging structures and so on), and netting is not required, or is even undesirable. An LFC would be fine for these Transactions.
Cross-transactional netting
The standard LFC deems each separate transaction to be executed under a “stand-alone” ISDA Master Agreement. Without fiddly additional amendments — importing much of the the heavy machinery of Sections 2(a)(iii), 5 and 6 — it would be hard to make an LFC “net”. That said, there is some “aggregation language” in every LFC, and every LFC has the same designated Termination Currency — but this may not pass muster for a swap dealer requiring full-blown netting recognition for regulatory capital calculations). Again, if you are executing single transactions where there is nothing to net, if all your transactions are the same way risk (e.g., where a customer is only buying pre-paid calls and puts), or if you absolutely do not want to allow cross-Transaction netting (as in the case of a Repackaging SPV, where transactions relating to different Series are contractually ring-fenced from each other and should never consolidate) then again an LFC might be a sensible option.
An format whose time may yet return?
The JC pines for the old LFCs. Clearly full-blown masters have their place for busy end-users trading a variety of risks against dealers. But the LFC has its place, and may help take smaller, less sophisticated users outside the minefield of full ISDA onboarding.