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 {{gmra}}) and on call (in the case of {{gmsla}}), so the “mischief” the [[cross default]] is designed to remedy — large [[credit exposure]] under transactions with long tenor and few regular cash-flows — does not exist.
+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.
-[[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 material payments will be regular [[interest]] payments, which might be as infrequent as quarterly, semi-annual or even annual. If the [[lender]] knows the [[borrower]] has defaulted on material [[indebtedness]] to ''another'' [[lender]] — some ''random'' — it will not want to wait nine months to see if there is a [[failure to pay]] on its own [[Loan|facility]] before taking any defensive action. Hence, a [[cross default]] right. If ''she'' can pull you down, ''I'' can pull you down.
+Remember that:
+*Large credit exposure
+*Long term exposure with no break rights
+*Infrequent cashflows
-===There’s no need to put one in. Even if you are doing [[term loan|term loans]].===
+[[Cross default]] is designed for transactions with ''all'' of these features. A standard SFT, has ''none'' of these features.
-All the talk of borrowers and lenders in [[Securities financing transaction - SFTR Provision|securities financing transactions]] makes a certain sort of person giddy. But remember: [[SFTR|SFTs]] are ''not'' contracts of [[indebtedness]]. {{gmslaprov|Lender}}s aren’t — legally or economically — [[lender|lenders]]. Thus, the omission of [[cross default]] from the standard [[SFT - SFTR Provision|SFT]] agreements ''was not a mistake''. It was deliberate.
-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}}.
+[[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:
 *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 payment flows happening daily as loaned {{gmslaprov|Securities}} and {{gmslaprov|Collateral}} values move around with the market, creating collateral transfers; and
+*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>