Template:Derivatives as specified indebtedness: Difference between revisions
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Be wary of including [[derivatives]] or other non-debt-like money payment obligations in the definition of {{isdaprov|Specified Indebtedness}}, no matter how high a {{isdaprov|Threshold Amount}}. We would say ''never'' do it, but the wise minds of the [[credit department]] may well be beyond your calming influence, so you may not have a choice. But if you have a choice, don’t do it. | Be wary of including [[derivatives]] or other non-debt-like money payment obligations in the definition of {{isdaprov|Specified Indebtedness}}, no matter how high a {{isdaprov|Threshold Amount}}. We would say ''never'' do it, but the wise minds of the [[credit department]] may well be beyond your calming influence, so you may not have a choice. But if you have a choice, don’t do it. | ||
{{isdaprov|Cross Default}} aggregates up all | In its unadulterated formulation, {{isdaprov|Cross Default}} aggregates up all {{isdaprov|Transaction}}-level defaults, so even though a single {{isdama}} would be unlikely to have a ''net'' [[out-of-the-money]] [[MTM]] of anywhere near the {{isdaprov|Threshold Amount}}, a large number of individual {{isdaprov|Transaction}} [[MTM]]s, if aggregated, may — particularly if you’re selective about which transactions you’re counting — ''which {{isdaprov|Cross Default}} entitles you to be''. | ||
Thus, where you have a large number of small failures, you can still have a big problem. This is why you should also [[carve out]] [[deposit]]s: [[Operational error|operational failure]] or regulatory action can create an immediate problem, especially for banks. | Thus, where you have a large number of small failures, you can still have a big problem. This is why you should also [[carve out]] [[deposit]]s: [[Operational error|operational failure]] or regulatory action can create an immediate problem, especially for banks. | ||
Revision as of 15:42, 3 November 2020
Derivatives as Specified Indebtedness
Be wary of including derivatives or other non-debt-like money payment obligations in the definition of Specified Indebtedness, no matter how high a Threshold Amount. We would say never do it, but the wise minds of the credit department may well be beyond your calming influence, so you may not have a choice. But if you have a choice, don’t do it.
In its unadulterated formulation, Cross Default aggregates up all Transaction-level defaults, so even though a single ISDA Master Agreement would be unlikely to have a net out-of-the-money MTM of anywhere near the Threshold Amount, a large number of individual Transaction MTMs, if aggregated, may — particularly if you’re selective about which transactions you’re counting — which Cross Default entitles you to be.
Thus, where you have a large number of small failures, you can still have a big problem. This is why you should also carve out deposits: operational failure or regulatory action can create an immediate problem, especially for banks.
Now it is true that you can provide the Specified Indebtedness represented by a master trading agreement can be calculated by reference to its net close-out amount, but this only really points up the imbalance between buy-side and sell-side. Sure, buy-side managers may have fifty or even a hundred ISDA Master Agreements but they will be split across dozens of different funds. Broker-dealers, on the other hand, will have hundreds of thousands of master agreements, all facing the same legal entity. Credit dudes: you are the wrong side of this risk, fellas.
Now seeing as most trading agreements are fully collateralised, and so don’t represent material indebtedness on a netted basis, it may be that even with hundreds of thousands of the blighters, no-one’s Threshold Amount will ever be seriously threatened. But if no Threshold Amount is ever at risk from an ISDA Master Agreement, then why are you including the ISDA Master Agreement in Specified Indebtedness in the first place?
O tempora. O paradox.