Template:First method: Difference between revisions
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Fun fact: That terrible [[FT book about derivatives]], and other like-minded sources, label the {{isdaprov|First Method}} a “[[limited two-way payments]]” clause, by which lights Long John Silver was a “limited two-legged pirate”. Less disingenuously also known as a “[[walkaway clause]]”, the {{isdaprov|First Method}}, which ensured that on [[close-out]] a {{isdaprov|Defaulting Party}} got paid nothing, regardless of how far in-the-money its {{isdaprov|Transaction}}s were, was rarely used, even in the heady days of 1990s when derivatives seemed fun, new and mostly harmless. | |||
Under the {{isdaprov|First Method}}, a payment is only ever made if the {{isdaprov|Settlement Amount}} is payable by the {{isdaprov|Defaulting Party}} to the {{isdaprov|Non-defaulting Party}}. This is, needless to say, a big fat free option against a {{gmslaprov|Defaulting Party}}. The {{isdaprov|First Method}} is thus a back door to withhold payments that otherwise would due under the {{isdama}}, it is hard to see why anyone in their right mind would give away this kind of optionality at the commencement of a derivative trading relationship, and, predictably, no one did. | |||
Very, very rarely seen. <br> | |||
Revision as of 13:54, 30 July 2019
Fun fact: That terrible FT book about derivatives, and other like-minded sources, label the First Method a “limited two-way payments” clause, by which lights Long John Silver was a “limited two-legged pirate”. Less disingenuously also known as a “walkaway clause”, the First Method, which ensured that on close-out a Defaulting Party got paid nothing, regardless of how far in-the-money its Transactions were, was rarely used, even in the heady days of 1990s when derivatives seemed fun, new and mostly harmless.
Under the First Method, a payment is only ever made if the Settlement Amount is payable by the Defaulting Party to the Non-defaulting Party. This is, needless to say, a big fat free option against a Defaulting Party. The First Method is thus a back door to withhold payments that otherwise would due under the ISDA Master Agreement, it is hard to see why anyone in their right mind would give away this kind of optionality at the commencement of a derivative trading relationship, and, predictably, no one did.
Very, very rarely seen.