Template:Cross default in securities financing agreements: Difference between revisions
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===There is no [[cross default]] in a securities financing transaction=== | ===There is no [[cross default]] in a [[securities financing]] transaction=== | ||
There’s no need for [[cross default]] in ''any'' [[master trading agreement]], actually — this is the [[JC]]’s considered view, about which you can read at length elsewhere — but the {{gmsla}} and {{gmra}} are a particularly bad candidates for cross default because their transactions are by definition short term (in the case of | There’s no need for [[cross default]] in ''any'' [[master trading agreement]], actually — this is the [[JC]]’s considered view, about which you can read at length [[Cross default|elsewhere]] — but the {{gmsla}} and {{gmra}} are a particularly bad candidates for [[cross default]] because their transactions are by definition short term (in the case of [[repo]]) and callable at any time (in the case of [[stock loans]]) and fully collateralised, so the “mischief” [[cross default]] is designed to fix — large [[credit exposure]] under long tenor transactions with few regular cash-flows — does not exist. | ||
Remember that: | |||
*Large credit exposure | |||
*Long term exposure with no break rights | |||
*Infrequent cashflows | |||
[[Cross default]] is designed for transactions with ''all'' of these features. A standard SFT, has ''none'' of these features. | |||
[[Cross default]], remember, is a banking concept, designed to protect [[Lender|lenders]] who have unsecured [[credit exposure]] to [[Borrower|borrowers]] under fixed rate [[Loan|loans]] where the only payments will be period [[interest]] payments, which might be only quarterly, half-yearly or even yearly. For your average [[credit officer]], a year between scheduled payments is ''a long time between drinks''. If {{sex|she}} knows the [[borrower]] has defaulted in a big way to some ''other'' [[lender]] — some ''random'' — the self-respecting credit officer will not want to wait nine months to for a [[failure to pay]] on its own [[Loan|facility]] before hitting DEFCON 5. she will want do do it straight away. Ideally, even before that random creditor has. | |||
Hence, she requires a [[cross default]] right. If ''random guy'' can pull you down, ''I'' can pull you down. | |||
===There’s no need to put one in. Even if you are doing [[term stock loan|term loans]].=== | |||
All the talk of borrowers and lenders in [[Securities financing transaction - SFTR Provision|securities financing transactions]] makes a fellow giddy. But remember: [[SFTR|SFTs]] are ''not'' contracts of [[indebtedness]]. Even though they’re ''called'' “[[loan]]s”, they are not actually, you know, ''[[loan]]s''. {{gmslaprov|Lender}}s aren’t — legally or economically — [[lender|lenders]]<ref>If anything, a fully collateralised lender, with a 5% haircut, is actually, net, a ''borrower''.</ref>. Thus, there is [[cross default]] in any standard [[SFT - SFTR Provision|SFT]] agreements. This ''was not a mistake''. It was deliberate. You don’t need one. | |||
Now, there is a certain stripe of [[credit officer]] who will not be convinced of this, [[Cassanova’s advice|and will want to put one in anyway]]. Does it do any harm? Well ''yes'', actually: it creates [[contingent liquidity]] issues for your own treasury department, whom [[credit]] will routinely ignore when making their credit requests. And yes, from the perspective of production waste in the [[negotiation]] process: insisting on a [[cross default]] is, par excellence, the [[waste]] of {{wasteprov|over-processing}}. | |||
===Yeah, but why not, just to be on the safe side?=== | |||
Why not put one in for good measure? [[SFT - SFTR Provision|SFTRs]] are collateralised daily, so: | Why not put one in for good measure? [[SFT - SFTR Provision|SFTRs]] are collateralised daily, so: | ||
*Neither party has material exposure<ref>Okay, okay, a {{gmslaprov|borrower}} under an [[agent lending]] transaction may have a significant exposure across all {{gmslaprov|lender}}s due to aggregated [[collateral]] [[Haircut|haircuts]], but that is by definition diversified risk, and the {{gmslaprov|borrower}} can generally break term transactions.</ref>; | *Neither party has material exposure<ref>Okay, okay, a {{gmslaprov|borrower}} under an [[agent lending]] transaction may have a significant exposure across all {{gmslaprov|lender}}s due to aggregated [[collateral]] [[Haircut|haircuts]], but that is by definition diversified risk, and the {{gmslaprov|borrower}} can generally break term transactions.</ref>; | ||
*There will usually be | *There will usually be payments flowing each way daily as loaned {{gmslaprov|Securities}} and {{gmslaprov|Collateral}} values move around, creating collateral transfers; and | ||
*Even if there aren’t, either party can recall the loans on any day<ref>Unless they are term transactions, but even there the terms tend to be short — ninety days is a maximum — and see above re usual daily [[collateral]] flows.</ref> | *Even if there aren’t, ''either party can recall the loans on any day''<ref>Unless they are [[term stock loan|term transactions]], but even there, the terms tend to be short — ninety days is a maximum — and see above re usual daily [[collateral]] flows.</ref> | ||
Revision as of 14:09, 19 June 2019
There is no cross default in a securities financing transaction
There’s no need for cross default in any master trading agreement, actually — this is the JC’s considered view, about which you can read at length elsewhere — but the 2010 GMSLA and Global Master Repurchase Agreement are a particularly bad candidates for cross default because their transactions are by definition short term (in the case of repo) and callable at any time (in the case of stock loans) and fully collateralised, so the “mischief” cross default is designed to fix — large credit exposure under long tenor transactions with few regular cash-flows — does not exist.
Remember that:
- Large credit exposure
- Long term exposure with no break rights
- Infrequent cashflows
Cross default is designed for transactions with all of these features. A standard SFT, has none of these features.
Cross default, remember, is a banking concept, designed to protect lenders who have unsecured credit exposure to borrowers under fixed rate loans where the only payments will be period interest payments, which might be only quarterly, half-yearly or even yearly. For your average credit officer, a year between scheduled payments is a long time between drinks. If she knows the borrower has defaulted in a big way to some other lender — some random — the self-respecting credit officer will not want to wait nine months to for a failure to pay on its own facility before hitting DEFCON 5. she will want do do it straight away. Ideally, even before that random creditor has.
Hence, she requires a cross default right. If random guy can pull you down, I can pull you down.
There’s no need to put one in. Even if you are doing term loans.
All the talk of borrowers and lenders in securities financing transactions makes a fellow giddy. But remember: SFTs are not contracts of indebtedness. Even though they’re called “loans”, they are not actually, you know, loans. Lenders aren’t — legally or economically — lenders[1]. Thus, there is cross default in any standard SFT agreements. This was not a mistake. It was deliberate. You don’t need one.
Now, there is a certain stripe of credit officer who will not be convinced of this, and will want to put one in anyway. Does it do any harm? Well yes, actually: it creates contingent liquidity issues for your own treasury department, whom credit will routinely ignore when making their credit requests. And yes, from the perspective of production waste in the negotiation process: insisting on a cross default is, par excellence, the waste of over-processing.
Yeah, but why not, just to be on the safe side?
Why not put one in for good measure? SFTRs are collateralised daily, so:
- Neither party has material exposure[2];
- There will usually be payments flowing each way daily as loaned Securities and Collateral values move around, creating collateral transfers; and
- Even if there aren’t, either party can recall the loans on any day[3]
- ↑ If anything, a fully collateralised lender, with a 5% haircut, is actually, net, a borrower.
- ↑ Okay, okay, a borrower under an agent lending transaction may have a significant exposure across all lenders due to aggregated collateral haircuts, but that is by definition diversified risk, and the borrower can generally break term transactions.
- ↑ Unless they are term transactions, but even there, the terms tend to be short — ninety days is a maximum — and see above re usual daily collateral flows.