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| In which JC ventures forth, uninvited, onto the topic of what makes a good ISDA. The same things, we rather think that make any good commercial contract, but ISDA is what we know so we should go with that.
| | So, what makes for a good ISDA? What makes ''any'' commercial contract good? |
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| The pre-printed master agreement is what it is — it was drafted, so conventional wisdom has it, to ''avoid'' controversy — so when we talk about the “qualities of a good ISDA” we mean of course its {{isdaprov|Schedule}}. That is where all the skirmishes are.
| | Bear in mind that a contract fulfils different purposes for different constituents during its life. For [[Sales]], it is a tool of [[persuasion]]. For [[Credit]], a long-range defensive strategy. For [[Operations]], a manual. For the [[Legal Eagles]], a ''crust''.<ref>There is an expanded riff on this for, premium subscribers, [https://jollycontrarian.com/secure/index.php?title=Purpose '''here'''].</ref> |
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| A scan of the subheads will reveal five basic qualities: fairness, clarity, consistency, simplicity and aptness to instil ''confidence''.
| | Crystalline legal exactitude is but one quality and, in most cases an oddly insignificant one in that, once a contract is signed, the overwhelming likelihood is that ''no-one will ever look at it again''. Not even Ops, once they have punched the collateral eligibility criteria into their systems. |
| These qualities interact and depend on each other.
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| ''Fair'' agreements must be ''clear'' for customers to realise they are fair. ''Clear'' agreements will inspire ''confidence'', in your own staff, thus distracting them from the [[Casanova principle]] and toward ''fairness''. ''Clarity'' and ''fairness'' lends itself to ''consistency'', since your customers will find less cause to negotiate. ''Clarity'', ''fairness'', ''confidence'' and ''consistency'' make for ''simplicity'' a simple record that is easy to maintain, roll out and, heaven forfend, enforce. | | The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to ''avoid'' controversy — it goes without saying “[[the sacred fourteen]]” are already immaculate: we mean, of course, “what makes a good ISDA ''{{isdaprov|Schedule}}''”. For it will be toiling over that grubby mortal [[appendix]] — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a [[negotiator]] will live out her days.<Ref>What is the difference between [[appendix|a schedule, an appendix and an annex]]?</ref> |
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| ===Fair===
| | It should have five basic qualities: ''fairness'', ''confidence'', ''clarity'', ''consistency'' and ''simplicity''. These qualities interact with and, in large part, depend on each other. |
| {{Quote|“There could be no negotiating with terrorists.”
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| :—Attributed to Richard Nixon}} | |
| {{Drop|[[Qualities of a good ISDA|F]]|airness as an}} abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in that [[alternative dispute resolution]] module but is sure to ship a haymaker to the jaw on first contact with the real commercial world. We are enculturated to treat a negotiation as some kind of trench warfare: as if we are facing a mortal enemy and not our customer. It is true that our customers tend to be similarly disposed — ''fairness'' never gets a chance to break out.
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| But this is no [[single round prisoner’s dilemma]]. To show fairness is not to show weakness, but ''strength''.
| | ''Fair'' agreements must be ''clear'' for customers to realise they are fair. |
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| JC is, by lifelong experience, a [[sell-side]] guy: he comes at this from the perspective of a merchant contracting with its customers. Hip types call these “B2C” deals, but the JC is not a one of those. Merchant and customer are, generally, on the same side: their interests conflict, but gently: the merchant wants a [[commission]] or a mark-up, the customer wants a good price, but beyond that each wishes earnestly for the other’s continued prosperity.
| | ''Clear'' agreements will inspire ''confidence'', in your own staff, thus distracting them from the temptations of [[Casanova principle|Casanova’s principle]] and toward ''fairness''. |
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| Things can get chewy at the extremes — but most customers never get near a [[tail event|chewy extreme]].
| | ''Clarity'' and ''fairness'' lend themselves also to ''consistency'' since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object. |
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| Now, we sell-siders may occasionally engage with ostensible ''hostiles'' — competitors, for example — but when we do, we abide by an unspoken pact of [[good faith]] for the limited ends which have brought our warring sides together. We must, at some level, trust one other, or have a common interest, or we would not contract at all.<ref>[[David Graeber]] makes a fascinating point when discussing the ''non''-origin of currency out from [[barter]]: [[barter]] is an arm’s length trade of equivalent goods conducted between parties who are dispositionally ''rivals'' and not partners. Once the exchange happens, nothing is left on the table; there is no presumption of enduring goodwill, no expectation of further business, or any kind of obligation undischarged. A barter is an exchange conducted with untrusted aliens. Inside your community, where there is trust, we are less compelled to extract our precise pound of flesh: there is a give and take; we let obligations lie undischarged and they acquire a moral quality. These are the ties that bind — the imperative becomes to ''avoid'' fully discharging our dues to each other. This is the relationship we should aspire to with our customers. We trust them to pay later — we extend ''credit''. (Hence money emerged not from fair value barter with strangers but as a way of evidencing indebtedness amongst those who knew each other. You don't extend credit to aliens.</ref>
| | ''Clarity'', ''fairness'', ''confidence'' and ''consistency'' make for ''simplicity'': a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce. |
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| So a presumption of any negotiation is [[good faith]]. ''Some'' level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, {{plainlink|https://www.bbc.co.uk/iplayer/episode/m001w2dd/the-traitors-australia-series-2-episode-9|this}} happens: The Traitor’s dilemma.
| | ===Fairness=== |
| | | {{Quote|“There could be no negotiating with terrorists.” |
| In any case, the “merchant-to-customer” contract is, by a landslide, the most common kind. Those with any [[in-house counsel]] experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, when there isn’t — ''the business will roll over''. No-one takes a point with a solvent client.
| | :—Attributed to Richard Nixon}} |
| | | {{Drop|[[Qualities of a good ISDA|F]]|airness as an}} abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in [[alternative dispute resolution]] class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal [[negotiation]] as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so ''fairness'' never gets a chance to break out. |
| This is nothing more than common sense: you stand far more to gain in future revenue by preserving your relationship at the small cost of excusing a customer the occasional gaffe than taking a literal stance on technical errors.
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| The instinct to “let it go” is so pronounced that compliance teams have contrived means to prevent the business granting these concessions for fear they are seen as impermissible “inducements”.<ref>Were it not for the deeply embedded [[agency problem]] inside most organisations, by dint of which these arrangements could well be, this would be a bit silly. As It is, it probably isn’t.</ref>
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| In any case, the [[commercial imperative]] is so overwhelming a factor in ongoing business relationship that there is little point in asking for, let alone achieving, terms that go beyond fair. ''No-one will ever use them''. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — [[the ideal negotiation is no negotiation|the ideal negotiation is ''no'' negotiation]] — you should start with a fair template.
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| ===Confident=== | |
| {{Drop|Y|our form should}} also inspire confidence, and not fear, in your own negotiating team. It is a fact of life that negotiators these days have less combat experience and expertise than they once had. If they are to do a good job they need to feel comfortable with their tools. They should ''understand'' your templates and the product it governs. You should encourage them to go beyond the contract’s formal articulation to grasp the underlying commercial drivers of the relationship. <ref>JC is well aware that, among [[management consultant]]s, this view borders on the heretical.</ref> If they do this, they will help you identify the parts of the contract that aren’t achieving what they seem to be. | |
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| A negotiator who fears her material will hide behind the formal rules you give her to manage it. She won’t be drawn to discuss it live — if she doesn’t comfortably understand the form and what it is trying to achieve, why would she put that vulnerability on show? — so will hide behind her keyboard, thereby contributing to the familiar experience of electronic trench warfare. She will lob long, bulleted issues lists over no-man’s-lsnd and into the enemy’s advanced positions, or even internally to internal risk departments, where they will hidden and sputter, being passed about for days, before eventually being lobbed back, annotated in [[BLOCK CAPITALS]] and with appended with yet more more bullets. This state of impasse can go on, as it did in Ypres, for years. You could write [[strange negotiation|war poetry]] about it.
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| Reverence to and intimidation by your own contractual form is madness, of course. While we should not be surprised, in our [[High modernism|high modernist]] times, that we fetishise the [[Substance and form|form over the substance]], ''deference'' to a contractual form that is plainly suboptimal is no cause for celebration. A confident negotiating team ''engages'' with the form rather than deferring to it. This is the negotiator’s version of “[[jidoka]]”: the human touch that makes the machine sing.
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| === Clear ===
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| {{Drop|[[Qualities of a good ISDA|O]]|f the many}} [[The purpose of an ISDA|purposes of the ISDA]], most deal with the ''present'' — desired capital treatment; the availability of close-out [[Close-out netting|netting]], margin obligations — and the ''past'' —representations and warranties, and [[Section 2(a)(iii) - ISDA Provision|conditions precedent to transacting and continuing to perform]] — but only one deals with the ''future''. The close-out terms: the circumstance in which one can break the glass, sound the alarm and head for the lifeboats. | |
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| Closeout terms will only come into serious contemplation at times of extreme stress: the market’s, your management’s and, therefore, ''yours''. The more the firm stands to lose, the more extreme those stressy circumstances are likely to be. Your management will be going mad — make no bones about that — but so will the market and, quite possibly, the geopolitical situation too. All kinds of people will be doing inexplicable things.
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| Your customers will be AWOL: the defaulting client certainly will. Bank chief executives won’t take each other’s calls. Prime Ministers will be ordering overseas embassies to max out their credit cards just to have cash on hand to meet the government’s obligations.<ref>This happened in New Zealand in 1981. [[Wage and price freeze|True story]]. </ref> Central bankers will be ordering the banks they regulate to lowball [[London Inter Bank Offered Rate|LIBOR]].<ref>Controversial, I know, but this seems increasingly likely to have been the case.</ref>
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| We do not imagine that, when they crafted its close-out mechanics, the ’squad had the wider general ''ambiance'' in which the ISDA’s s last-resort rights would be exercised. They ''can’t'' have. We imagine they pictured the close-out urge coming upon the responsible credit officer, in isolation, at a time of beatific placidity: that there would be time and space to consider and quietly contemplate what must be done, perhaps with a frisson of regret for the poor customer whom one is letting down.
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| ''It will not be like that.''
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| There will be multiple counterparty failures at once. All kinds of things will be stretching your attention, and your management’s. There will be allegations — unproven, unverifiable, and likely false ''but at the time you won’t know it'' — of fraud, of dastardly dealing, of internecine conflicts within the client, of side-conversations with your CEO who is allegedly related to the chief investment officer by marriage, of predatory competitors beating you to the close-out punch and eating your lunch. All of this is the fog of war.
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| Even among those who had them in the first place, patience and a sense of humour will be in short supply. People — many, ''many'' people — will want short, clipped answers to different questions they are all shouting at you at once — ''to which there are no short, clipped answers''. If you even understand the question, the last thing anyone wants to hear by way of answer is, “ahhh, it’s ''complicated''” or, God forbid, “the contract is not clear.”
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| And bet your bottom dollar, it will ''not'' be clear.
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| This, counsels, we think — and we are obliged to say the JC seems to be on his own about this one — short, clear, plain, ''blunt'' termination language, with simple-to-follow events addressing only generally catastrophic circumstances. The day is going to be an omnishambles, so make your job on that day as easy as it can possibly be.
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| The reality is that most of the weapons you need are embedded in the pre-printed form of the ISDA master agreement itself. Do not mess around with these, try to resist the temptation to unnecessarily augment them, and have ready-at-hand a simple step-by-step guide to how to get through them without screwing anything up. Like [[Closing out an ISDA|this one]].
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| === Consistent ===
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| {{Drop|I|t helps with}} clarity if you have confidence, in a scrape, that you know what your ISDA is going to say where it matters. You can be sure of this if you are control quality where it matters. (Where it doesn’t — where the request is to acquiesce to a counterparty’s modern slavery policy — which it win’t disclose to you — or agreeing to the ethical treatment of the polar bears etc, you can afford to take a view.)
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| “This is all very well but how, JC, are we supposed to force a counterparty to take our credit terms? It is a competitive market! No-one in their right mind would do that! We must negotiate every time! And plus, we can’t stop our counterparties insisting on bespoke terms, you know: this is a client service business! We cannot dictate!”
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| Quite so: and to get you through the livelong day we commend [[serenity’s prayer]] to you.
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| You cannot control everything, it is true. But there are some things you ''can'' control: the starting point for your own docs, for one thing — and some things certainly cannot be able to: the customer’s pet peeves.
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| But pet peeves have the general quality of being correct: few people are peeved at a failure to pay clause.
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| If you configure your human system to constantly ''sand off'' rough edges when you encounter them then these pet peeves serve as a kind of carborundum.
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| It is a curious fact that augmentations to a template — scar tissue from previous wounds —have a habit of sticking to your legal forms, whereas simplifications do not. This is a cultural matter. It is in your gift to change it. You just need to take hearts and minds with you.
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| ====== Your forms ======
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| if you start off with something you know to be offensive do not be surprised when they do not accept it.
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| A useful rhetorical, seldom posed us this:
| | This is, in theory, odd. After all, between good-faith traders in the marketplace, commercial negotiation is no [[single round prisoner’s dilemma]]. To show fairness is not to show weakness, but ''strength''. |
| {{Quote|If someone presented this term to me, would ''I'' accept it?}}
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| Rebase your documents to executable, at least in concept, from the off.
| | So why the hostility? Puzzles like this often boil down to variations of the [[agency problem]]. They can usually be untangled by asking, ''[[cui bono]]''? Usually, we will find a well-meaning professional adviser “making herself useful” by “[[for the avoidance of doubt|avoiding doubt]]”. This is no exception. |
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| ====Platinum plating====
| | JC is, by lifelong experience, a [[sell-side]] guy: his clients are ''providers'' of financial services who contract with people who ''want'' them. Merchant and customer are, here as in any marketplace, generally aligned: at the limit, their interests conflict, but gently: the merchant wants a big [[commission]], the customer wants to pay a little one, but beyond that, each wishes earnestly for the other’s continued prosperity. |
| There is a false economy — at any rate a misalignment of risk and reward — in the widely held belief that “platinum” customers should be offered better terms then regular ones. Some firms even triage their starting point based on the size of the client.
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| This has things precisely backwards. Your platinum generate the most revenue by taking the most risk customers take greater risk and present greater catastrophe.. on a greater scale stop if you are prepared to run this risk with the premium customer then you should be prepared to run it with a smaller custom or two. This will also reduce the time you spend fruitlessly negotiating with customers who you know be generating less of your revenue.
| | Things ''can'' get chewy at the extremes when large sums of money are involved — but most dealers and most customers never get near a [[tail event|chewy extreme]]. |
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| Nor does de-escalating your starting position we can your hand in the negotiation. Your walk away remains your walk away Colin the sooner you get to it the better that it's does not take long tends to focus our customers mind even one a customed to long and rewarding negotiations.
| | We occasionally engage directly with ostensible ''hostiles'' — competitors, for example — but even then, we do so under an unspoken pact of [[good faith]] for the limited ends which have brought us together. We must, at some level, trust those with whom we contract, even if they are rivals. We must have some common interest. If we did not, we would not contract at all. {{maxim|No-one enters a contract she expects her counterparty to break}}. |
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| Furthermore if you are diligent and consistent in your positioning, customers and their advisors will quickly tyre of banging their heads against a brick wall and will accept what is, after all, a reasonable position.
| | Sidenote: the late [[David Graeber]] made a fascinating point when discussing the ''non''-origin of money from [[barter]]: [[barter]] is an arm’s length trade of equivalent goods between parties who are dispositionally ''rivals'' and not partners. |
| | Once the exchange happens, nothing is left on the table; there is no presumption of goodwill, no expectation of further business, no obligations are undischarged. This is a [[delivery-versus-payment]] exchange between untrusting aliens. This is not needed within a community of trust. Where there is trust we need not extract a pound of flesh: there is a give and take; we let obligations lie undischarged on faith they will be performed later. Our gestures acquire a moral quality. These are the ties that bind — the imperative becomes to ''avoid'' fully discharging our dues to each other and thereby undoing those ties. |
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| ====== Customer pet peeves ======
| | This is the relationship we should aspire to with our customers. We trust them to pay later — we extend ''credit''. We do them favours, they appreciate it, and reward us with social, not economic, capital in the shape of more business. Hence, says [[David Graeber|Graeber]], money emerged not from barter with strangers, but to memorialise mutual debts among friends. You don’t extend credit to your enemies. |
| It is true that you cannot change the negotiating position of a truculent customer, but by rebating your documents to something more agreeable you perhaps avoid painting the clients into a corner from which it will not then back down in the first place.
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| === Simple ===
| | So, we presume [[good faith]] in any negotiation: ''some'' level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “{{plainlink|https://www.bbc.co.uk/iplayer/episode/m001w2dd/the-traitors-australia-series-2-episode-9|traitor’s dilemma}}”. This makes for good TV, but bad business. |
| All else being equal, make it ''simple''. This is somewhat conditional, by serenity's prayer, your counterparty night have a ten for its own convoluted terms, and it takes advanced Dale Carnegie diplomacy to persuade such a chap not to self-harm — but at the least do not be the progenitor of unnecessary complication. Convolution causes confusion, confusion leads to explanation, explanation leads eventually to resolution, but that resolution takes time, burns resources, and comes at the cost of formal or even substantive variance from your standard.
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| Having to explain something that should have been clear in the first place is, at the least wasted energy.
| | The “merchant-to-customer” contract is, by a landslide, the most common kind. Once signed, these are filed somewhere and never again reviewed — it is bad form to pay too much attention to the letter of a deal, even should there later be an argument.<ref>{{maxim|if you have to go to the contract, you’ve already lost}}.</ref> |
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| Use plain language. Short sentences, modern language. Write agreeably: “must” instead of “shall be obligated to —”; “may” instead of “shall be entitled but, for the avoidance of doubt, not obliged to —”.
| | [[Inhouse counsel]] with experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, even when there isn’t — ''the business will roll over''. No-one takes a point with a [[Insolvency|solvent]] client. |
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| But simple aids easy comprehension at the time when things are going to hell.
| | This is no more than [[commercial imperative|commercial common sense]]: you stand to gain far more by preserving your relationship, even where that means excusing a customer the occasional gaffe, and ''trading'' on it than you do by taking a literal stance on technical indiscretions. That is ''[[barter]]'' behaviour. |
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| It is defiantly standard, to the point where some will amend the schedule by reference to the line numbers in the pre-printed standard. (Don't do this: there are reformatted versions floating around with different pagination and it makes for confusion when your ISDA is scanned as text into the Edgar database etc.). It has twenty one years of history, too, and is now so canonical it is hard to imagine ISDA publishing a new one.
| | This instinct amongst business people to “just let it go” is so pronounced, indeed, as to unnerve regulators and [[compliance]] departments, who have contrived ways to stop it, for fear it “induces” — a fancy way of saying “bribes” — clients to continue giving business.<ref>Were it not for the deeply embedded [[agency problem]] inside most organisations, by dint of which these arrangements could well be, this would be a bit silly. As it is, it probably isn’t. There it goes: the good old [[agency problem]], again.</ref> |
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| Almost all the tools you need are in the master. It bears repeating that, in these days of daily variation margin, it will be a rare day when your only option to close out a potentially loss making ISDA will be some bespoke Additional Termination Event like a NAV trigger or a key man provision. One more right will complete the set: a right to call for more margin. Most prime brokers have this. If you can, by close of day, engineer a failure to pay (or an infusion of cash) then your key person trigger, cross default rights, financial reports, representations and warranties are little use to you.
| | In any case, the [[commercial imperative]] is so overwhelming that there is little point in asking for, let alone achieving, terms in contracts that go beyond “fair”. ''You will never use them''. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — {{maxim|the ideal negotiation is no negotiation}} — it behoves you to have a fair template. |
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| [Another argument against bilateral margin: the customer can always close out a trade: the dealer is not on risk, QED, and will always give a price to exit — the unwind price on its hedge. It is not generally a taxable event for the dealer. Dealers can’t unilaterally terminate customer positions, and even where they can — [[synthetic prime broker]]s generally have the ''right'' to — they generally won’t, without extreme provocation, ''because that would upset the customer''.
| | Make your templates ''fair''. |
So, what makes for a good ISDA? What makes any commercial contract good?
Bear in mind that a contract fulfils different purposes for different constituents during its life. For Sales, it is a tool of persuasion. For Credit, a long-range defensive strategy. For Operations, a manual. For the Legal Eagles, a crust.[1]
Crystalline legal exactitude is but one quality and, in most cases an oddly insignificant one in that, once a contract is signed, the overwhelming likelihood is that no-one will ever look at it again. Not even Ops, once they have punched the collateral eligibility criteria into their systems.
The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to avoid controversy — it goes without saying “the sacred fourteen” are already immaculate: we mean, of course, “what makes a good ISDA Schedule”. For it will be toiling over that grubby mortal appendix — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a negotiator will live out her days.[2]
It should have five basic qualities: fairness, confidence, clarity, consistency and simplicity. These qualities interact with and, in large part, depend on each other.
Fair agreements must be clear for customers to realise they are fair.
Clear agreements will inspire confidence, in your own staff, thus distracting them from the temptations of Casanova’s principle and toward fairness.
Clarity and fairness lend themselves also to consistency since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object.
Clarity, fairness, confidence and consistency make for simplicity: a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce.
Fairness
“There could be no negotiating with terrorists.”
- —Attributed to Richard Nixon
Fairness as an abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in alternative dispute resolution class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal negotiation as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so fairness never gets a chance to break out.
This is, in theory, odd. After all, between good-faith traders in the marketplace, commercial negotiation is no single round prisoner’s dilemma. To show fairness is not to show weakness, but strength.
So why the hostility? Puzzles like this often boil down to variations of the agency problem. They can usually be untangled by asking, cui bono? Usually, we will find a well-meaning professional adviser “making herself useful” by “avoiding doubt”. This is no exception.
JC is, by lifelong experience, a sell-side guy: his clients are providers of financial services who contract with people who want them. Merchant and customer are, here as in any marketplace, generally aligned: at the limit, their interests conflict, but gently: the merchant wants a big commission, the customer wants to pay a little one, but beyond that, each wishes earnestly for the other’s continued prosperity.
Things can get chewy at the extremes when large sums of money are involved — but most dealers and most customers never get near a chewy extreme.
We occasionally engage directly with ostensible hostiles — competitors, for example — but even then, we do so under an unspoken pact of good faith for the limited ends which have brought us together. We must, at some level, trust those with whom we contract, even if they are rivals. We must have some common interest. If we did not, we would not contract at all. No-one enters a contract she expects her counterparty to break.
Sidenote: the late David Graeber made a fascinating point when discussing the non-origin of money from barter: barter is an arm’s length trade of equivalent goods between parties who are dispositionally rivals and not partners.
Once the exchange happens, nothing is left on the table; there is no presumption of goodwill, no expectation of further business, no obligations are undischarged. This is a delivery-versus-payment exchange between untrusting aliens. This is not needed within a community of trust. Where there is trust we need not extract a pound of flesh: there is a give and take; we let obligations lie undischarged on faith they will be performed later. Our gestures acquire a moral quality. These are the ties that bind — the imperative becomes to avoid fully discharging our dues to each other and thereby undoing those ties.
This is the relationship we should aspire to with our customers. We trust them to pay later — we extend credit. We do them favours, they appreciate it, and reward us with social, not economic, capital in the shape of more business. Hence, says Graeber, money emerged not from barter with strangers, but to memorialise mutual debts among friends. You don’t extend credit to your enemies.
So, we presume good faith in any negotiation: some level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “traitor’s dilemma”. This makes for good TV, but bad business.
The “merchant-to-customer” contract is, by a landslide, the most common kind. Once signed, these are filed somewhere and never again reviewed — it is bad form to pay too much attention to the letter of a deal, even should there later be an argument.[3]
Inhouse counsel with experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, even when there isn’t — the business will roll over. No-one takes a point with a solvent client.
This is no more than commercial common sense: you stand to gain far more by preserving your relationship, even where that means excusing a customer the occasional gaffe, and trading on it than you do by taking a literal stance on technical indiscretions. That is barter behaviour.
This instinct amongst business people to “just let it go” is so pronounced, indeed, as to unnerve regulators and compliance departments, who have contrived ways to stop it, for fear it “induces” — a fancy way of saying “bribes” — clients to continue giving business.[4]
In any case, the commercial imperative is so overwhelming that there is little point in asking for, let alone achieving, terms in contracts that go beyond “fair”. You will never use them. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — the ideal negotiation is no negotiation — it behoves you to have a fair template.
Make your templates fair.