|
|
| (18 intermediate revisions by the same user not shown) |
| Line 1: |
Line 1: |
| ==[[Closing out]] an {{isdama}} following an {{isdaprov|Event of Default}}==
| | JC’s has updated the step-by-step guide to closing out an ISDA and it is now {{premium}}. You can access it '''[[pjc:Close out|here]]'''. |
| Here is the [[JC]]’s handy guide to [[closing out]] an {{isdama}}. We have assumed you are [[closing out]] as a result of a {{{{{1}}}|Failure to Pay or Deliver}} under Section {{{{{1}}}|5(a)(i)}}, because — unless you have inadvertently crossed some [[Tannhäuser Gate|portal, wormhole]] into a parallel but stupider universe — if an {{isdama}} had gone toes-up, that’s almost certainly why. That, or at a pinch {{{{{1}}}|Bankruptcy}}. Don’t try telling your [[credit officer]]s this, by the way: they won’t believe you — and they tend to get a bit wounded at the suggestion that their beloved [[NAV triggers]] are a waste of space.
| |
| | |
| In what follows “{{isdaprov|Close-out Amount}}” means, well, “{{isdaprov|Close-out Amount}}” (if under a {{2002ma}}) or “{{isda92prov|Loss}}” or “{{isda92prov|Market Quotation}}” amount (if under a {{1992ma}}), and “{{{{{1}}}|Early Termination Amount}}” means, for the {{1992ma}}, which neglected to give this key value a memorable name, “the amount, if any, payable in respect of an {{{{{1}}}|Early Termination Date}} and determined pursuant to Section {{isda92prov|6(e)}}”.
| |
| | |
| So, to close out following a {{isdaprov|Failure to Pay or Deliver}}, you will need:
| |
| ===1. There must be a failure to pay or deliver under Section {{{{{1}}}|5(a)(i)}}===
| |
| A {{{{{1}}}|Failure to Pay or Deliver}}, by the {{{{{1}}}|Defaulting Party}} to make a payment or delivery when due on day '''T'''. This is not, yet, an {{{{{1}}}|Event of Default}} under Section {{{{{1}}}|5(a)(i)}}. But we are on the way.
| |
| | |
| ===2. You must give notice of the failure under Section {{{{{1}}}|5(a)(i)}}===
| |
| The {{{{{1}}}|Non-defaulting Party}} must give the {{{{{1}}}|Defaulting Party}} notice of the failure. This is ''not'' a Section {{{{{1}}}|6(a)}} notice — calm, down, we will get to that in good time — but a Section 5(a)(i) notice of failure to pay or deliver. The sainted {{isdama}} does not directly prescribe the format for this notice, but Section {{{{{1}}}|12}} cautions that it may not be by {{isdaprov|e-mail}} or {{{{{1}}}|electronic messaging system}} or (if you have a {{1992ma}}, at any rate), by [[fax]]. The proper form is to have it hand-delivered by someone prepared to swear an affidavit as to when and where they delivered it to the {{isdaprov|Defaulting Party}}..<ref>Yes, it’s true: in ISDA’s alternative universe, [[Greenclose v National Westminster Bank plc|e-mail and electronic messaging systems are different things]].</ref>
| |
| | |
| Since payments and deliveries are generally due at [[close of business]] on a given day, [[Q.E.D.]], a Section {{{{{1}}}|5(a)(i)}} notice of {{{{{1}}}|Failure to Pay or Deliver}} can usually only be given ''after'' [[close of business]] on the due date.
| |
| | |
| Thanks to Section {{{{{1}}}|12(a)}} ({{{{{1}}}|Notices}}), the Section {{{{{1}}}|5(a)(i)}} notice will only be effective on the following {{{{{1}}}|Local Business Day}}: i.e., '''T+1'''. <ref>'''Spod’s note''': This notice requirement is key from a [[cross default]] perspective (if you have been indelicate enough to widen the scope of your [[cross default]] to include [[derivatives]], that is): if you don’t have it, ''any'' failure to pay under your {{isdama}}, however innocuous — even an operational oversight — automatically counts as an Event of Default, and gives a different person to the right to close ''their'' {{isdama}} with your Defaulting Party because of it defaulted to ''you'', even though (a) the Defaulting Party ''hasn’t'' defaulted to ''them'', and (b) you have decided not to take any action against the Defaulting Party yourself.</ref>
| |
| | |
| ===3. You must allow the [[grace period]] under Section {{{{{1}}}|5(a)(i)}} to expire===
| |
| At this point you have a {{{{{1}}}|Potential Event of Default}}, but not an ''actual'' one.
| |
| | |
| Once your Section {{{{{1}}}|5(a)(i)}} notice of {{{{{1}}}|Failure to Pay or Deliver}} is effective, the {{{{{1}}}|Defaulting Party}} has a “[[grace period]]” in which it sort itself out and make the payment or delivey and head off an {{isdaprov|Event of Default}}.
| |
| | |
| The standard [[grace period]]s are set out in Section {{{{{1}}}|5(a)(i)}}. Be careful: under a {{2002ma}} the standard is '''''one''''' {{isdaprov|Local Business Day}}. Under the {{1992ma}} the standard is '''''three''''' {{isda92prov|Local Business Day}}s. ''But check the {{{{{1}}}|Schedule}}'' because in either case this is the sort of thing that counterparties adjust: {{2002ma}}s are often adjusted to conform to the {{1992ma}} standard of three {{{{{1}}}|LBD}}s, for example.
| |
| | |
| So: once you have a clear, notified {{{{{1}}}|Failure to Pay or Deliver}}, you have to wait ''at least'' one and possibly three or more {{{{{1}}}|Local Business Day}}s before doing anything about it. Therefore you are on tenterhooks until the [[close of business]] '''T+2''' {{{{{1}}}|LBD}}s (standard {{2002ma}}), or '''T+4''' {{isda92prov|LBD}}s (standard {{1992ma}}).
| |
| | |
| Let us imagine for a moment you have indeed waited the necessary time.
| |
| | |
| ===4. You may now send your Section {{{{{1}}}|6(a)}} notice designating an {{{{{1}}}|Early Termination Date}} ===
| |
| At the expiry of the Section {{{{{1}}}|5(a)(i)}} [[grace period]], you finally have a fully operational {{{{{1}}}|Event of Default}}. Now Section {{{{{1}}}|6(a)}} allows you, by ''not more than 20 days’ notice''<ref name="20days">See discussion on at Section {{isdaprov|6(a)}} about the silliness of that time limit.</ref> to designate an {{{{{1}}}|Early Termination Date}} for all outstanding {{isdaprov|Transaction}}s.
| |
| | |
| So, at some point in the next twenty days<ref name="20days"/> there will be a final reckoning and one Party will pay the other the {{isdaprov|Early Termination Amount}}.<ref>By a striking oversight, not actually so named in the {{1992ma}}.</ref>But we have a ways to go before we even know what that amount will be. But observe: the payment date is now locked in. Time to get your skates on and start closing out {{{{{1}}}|Transactions}}.
| |
| | |
| ===5. Determine {{{{{1}}}|Close-out Amount}}s<ref name="close out amounts">Or their equivalents under the {{1992ma}}, of course.</ref>===
| |
| One must now ascertain termination values for the {{{{{1}}}|Terminated Transaction}}s as of the {{isdaprov|Early Termination Date}} per the methodology set out in Section {{{{{1}}}|6(e)(i)}}.
| |
| | |
| Now armed with our crystalised {{{{{1}}}|Failure to Pay or Deliver}} {{{{{1}}}|Event of Default}} and with an {{{{{1}}}|Early Termination Date}} to target, we go directly to Section {{{{{1}}}|6(e)}}, noting as we fly over it, that Section {{{{{1}}}|6(c)}} reminds us [[for the avoidance of doubt]] that even if the {{{{{1}}}|Event of Default}} which triggers the {{{{{1}}}|Early Termination Date}} evaporates in the meantime — these things happen, okay? — yon {{{{{1}}}|Defaulting Party}}’s goose is still irretrievably cooked.<ref>If [[Credit department|Credit]] suddenly gets executioner’s remorse and wants to let the Defaulting Party off), the Non-defaulting Party will have to expressly terminate the close-out process, preferably by written notice. There’s an argument — though it is hard to picture the time or place on God’s green earth where a Defaulting Party would make it — that cancelling an in-flight close out is no longer exclusively in the Defaulting Party’s gift, and requires the NDP’s consent. It would be an odd, self-harming kind of Defaulting Party that would run ''that'' argument unless the market was properly gyrating.</ref>
| |
| | |
| There is a bit of a [[chicken licken]]-and-egg situation here as you can’t really work out their [[mark-to-market]] values for that date at any time ''before'' that date, unless you are able to see into the future or something. Anyway, that’s a conundrum for your [[Trader|trading]] people (and in-house [[Metaphysics|metaphysicians]]) to deal with and it need not trouble we [[Legal Eagles|eagles of the law]]. For our purposes, the trading and risk people need to come up with {{isdaprov|Close-out Amount}}s for all outstanding {{{{{1}}}|Transaction}}s. Once they have done that you are ready for your Section {{{{{1}}}|6(e)}} notice.
| |
| | |
| ==={{{{{1}}}|Early Termination Amount}}===
| |
| Your inhouse metaphysicians having calculated your {{isdaprov|Close-out Amount}}s,<ref name="close out amounts"/> you must assemble all the values into an Early Termination Amount.<ref>Or, in the {{1992ma}}’s estimable prose, “the amount, if any, payable in respect of an {{isdaprov|Early Termination Date}} and determined pursuant to this Section”.</ref> This must be paid on that day you selected way back in step 4, when you designated an {{{{{1}}}|Early Termination Date}}.
| |
JC’s has updated the step-by-step guide to closing out an ISDA and it is now premium content. You can access it here.