|
|
| (One intermediate revision by the same user not shown) |
| Line 1: |
Line 1: |
| {{6(e)(i) capsule}} | | {{isda 6(e)(i) summ|isdaprov}} |
| ===First terminate Transactions...===
| |
| The effect of Section {{isdaprov|6(e)(i)}} is that in closing out an {{isdama}}, first you must terminate all {{isdaprov|Transaction}}s to arrive at a {{isdaprov|Close-out Amount}} for each one.
| |
| | |
| The {{isdaprov|Close-out Amount}} is the replacement cost for the {{isdaprov|Transaction}}, assuming all payments up to the {{isdaprov|Early Termination Date}} have been made — but in a [[closeout]] scenario, of course, [[Q.E.D.]] some of those will ''not'' have been made — being the reason you need to close out.
| |
| | |
| Hence the converse concept of “{{isdaprov|Unpaid Amount}}s”, being amounts that ''should'' have been paid or delivered under the {{isdaprov|Transaction}} on or before the termination date, but weren’t (hence, we presume, why good sir is closing out the {{isdama}} in the first place).
| |
| | |
| So once you have your theoretical replacement cost for each Transaction, you then have to tot up all the {{isdaprov|Unpaid Amount}}s that had fallen due but had not been paid under those {{isdaprov|Transaction}}s at the time the {{isdaprov|Transaction}}s terminated. These include, obviously, failures by the {{isdaprov|Defaulting Party}}, but also amounts the ''{{isdaprov|Non-defaulting Party}}'' didn’t pay when it relied on the [[flawed asset]] provision of Section {{isdaprov|2(a)(iii)}} to withhold amounts it would otherwise have been due to pay under the Transaction after the default but before it was terminated.<ref>There is a technical exception here for Parties under a {{1992ma}} under which the {{isda92prov|First Method}} applies. But since the {{isda92prov|First Method}} is insane and no-one in their right mind would ever have it in a live contract, we mention it only for completeness.</ref>
| |
| | |
| ===...''then'' calculate net {{isdaprov|Early Termination Amount}}===
| |
| The close out itself happens under Section {{isdaprov|6(e)}} of the {{isdama}} and the recourse is to a net sum. Netting does ''not'' happen under the {{isdaprov|Transactions}} — on the theory of the game there are no outstanding Transactions at the point of netting; just payables.
| |
| | |
| Therefore, if your [[credit support]] (particularly [[guarantee]]s or [[LC|letters of credit]]) explicitly reference amounts due under specific {{isdaprov|Transaction}}s, you may lose any credit support at precisely the point you need it.
| |
| | |
| Which would be a bummer. Further commentary on the [[Guarantee]] page.
| |