Template:M gen 2002 ISDA 2(a)(iii): Difference between revisions
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===Negotiation points=== | |||
====Non-payment delivery defaults==== | |||
Say you’re a corporate in the habit of buying [[OTC]] [[call]]s or [[put]]s from your broker under the ISDA framework. The basic structure of these, as for any option, is “customer pays broker premium, day one; if the option is in-the-money on the exercise date, broker pays customer market price minus strike price”. That is, after the trade date, the customer never has to pay anything: it just has a right to be paid if it wins its bet. Imagine having executed and settled premium on such a trade, the customer’s bet turns out to be wildly successful but, before the customer gets around to exercising (American option) or is able to exercise (European option), the customer suffers an {{isdaprov|Event of Default}} — some, as we rehearse elsewhere, are rather nebulous: {{isdaprov|Cross Default}}, {{isdaprov|Misrepresentation}} and {{isdaprov|Bankruptcy}}; some are trivial: ''any'' {{isdaprov|Breach of Agreement}} is, if uncured after 30 days, an {{isdaprov|Event of Default}} and therefore, ''from the instant it is committed'' a {{isdaprov|Potential Event of Default}} (in that it is contingent only on the passage of time). | |||
===Why the regulators don’t like Section {{isdaprov|2(a)(iii)}}=== | ===Why the regulators don’t like Section {{isdaprov|2(a)(iii)}}=== | ||
While not concluding that {{isdaprov|2(a)(iii)}} is ''necessarily'' a “[[Walkaway clause|walk-away clause]]” (or an “[[ipso facto clause|ipso facto]]” clause, as it is called in the US) UK regulators were concerned after the financial crisis that Section {{isdaprov|2(a)(iii)}} could be used to that effect and wondered aloud whether such practices should be allowed to continue. Why? Because you are kicking a fellow when he is down, in essence. | While not concluding that {{isdaprov|2(a)(iii)}} is ''necessarily'' a “[[Walkaway clause|walk-away clause]]” (or an “[[ipso facto clause|ipso facto]]” clause, as it is called in the US) UK regulators were concerned after the financial crisis that Section {{isdaprov|2(a)(iii)}} could be used to that effect and wondered aloud whether such practices should be allowed to continue. Why? Because you are kicking a fellow when he is down, in essence. | ||