Template:M summ 2018 CSD 13(h)

What an omnishambles. ISDA’s crack drafting squad™ may usually be tiresome, leaden in its literary style, and pernickety to the point of distraction, but one thing you can say for it is that it does, usually, do things properly. It is thorough. It leaves no stone unturned, even when you wish it rather had.

With this provision it looks like the ’squad got to the point of maximum disarray, with all rocks upturned and slaters, bugs and cockroaches scuttling everywhere, and it just had a tantrum and stormed off. These provisions don’t even make sense. They are not even grammatical.

What were they trying to achieve? go figure.

God only knows what they thought they were trying to achieve. Whatever remote objective they had as a goal, and whatever contingencies were dogging the ’squad’s fevered subconscious as they trudged, in formation, through the moist, dengue-infested swamps of of this drafting exercise — and there is some talk that there may have been skirmishes with pockets of rogue buy-side advisors to distract them as they went waded through the hip-high sludge — what is left to posterity is a confused, gibbering disaster.

What did they need to achieve? Straightforward

All this provision does is describe when a Secured Party can actually take the initial margin the Custodian (IM) is holding for it.

You should not be surprised to hear this should be, more or less, when the Chargor has actually defaulted and been closed out — and, really, the control of secured collateral held under Control Agreement would ordinarily be most suitably dealt by that Control Agreement. The clue, surely, is in the name?

Until the ISDA Master Agreement has been fully closed out and the Early Termination Amount — that is, the total amount due following termination and valuation of all Transactions following the default — determined, you don’t definitively know what you are owed, so what business have you got appropriating the Initial Margin? Nor do you have any credit risk over it: it is held at a thiurd party and secured in your favour. Cool your jets.

But that would be too easy and not nearly circuitous enough. How are you meant to keep armies of legal eagles employed if it is as straightforward as that?

So ISDA confused everything by adding a whole new range of “Access Conditions” — just in case these are different from actually executed close out events (why would they be?), and then confabulating, half-heartedly, all kinds of different triggers for this access.

For those who don’t trust Control Agreements to do what they say on the tin, consider this kind of wording:

“Secured Party Rights Event” means that, following the occurrence or designation of an Early Termination Date with respect to all outstanding Transactions, an Early Termination Amount payable by the Chargor has been determined and notified to the Chargor under Section 6(d), and the Chargor has not paid it in full when due under Section 6(d)(ii).