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==The financial difference between an {{isdaprov|Affected Party}} and a {{isdaprov|Defaulting Party}}== | |||
What is the practical, economic difference between being closed out on the same transaction for an {{isdaprov|Event of Default}} and a {{isdaprov|Termination Event}}? This is something that all [[ISDA ninja]]s know, or sort of intuit, in a sort of semi-conscious, buried-somewhere-deep-in-the-brain-stem kind of way, but they may mutter darkly and try to change the subject if you ask them to articulate it. So, with feeling, here it is: | What is the practical, economic difference between being closed out on the same transaction for an {{isdaprov|Event of Default}} and a {{isdaprov|Termination Event}}? This is something that all [[ISDA ninja]]s know, or sort of intuit, in a sort of semi-conscious, buried-somewhere-deep-in-the-brain-stem kind of way, but they may mutter darkly and try to change the subject if you ask them to articulate it. | ||
This might be of chiefly academic interest were it not for the unfortunate habit of the same real world event potentially comprising more than one variety of termination right. This leads to some laboured prioritisation in the ISDA, and sometimes some in the Schedule too. | |||
So, with feeling, here it is: | |||
===The Definition of Close-out Amount=== | |||
Remember the way a Determining Party values a Terminated Transaction is calculates its ''own'' close-out value — in our nutshell terms, “the losses the {{isdaprov|Determining Party}} would incur (positive) or gains it would realise (negative) in replacing the material terms and the option rights of the parties under a {{isdaprov|Terminated Transaction}}”. One assesses “the costs one would incur” from ones’ own side of the market. A large party of the question comes down to who the Determining Party is for a given termination event. | Remember the way a Determining Party values a Terminated Transaction is calculates its ''own'' close-out value — in our nutshell terms, “the losses the {{isdaprov|Determining Party}} would incur (positive) or gains it would realise (negative) in replacing the material terms and the option rights of the parties under a {{isdaprov|Terminated Transaction}}”. One assesses “the costs one would incur” from ones’ own side of the market. A large party of the question comes down to who the Determining Party is for a given termination event. | ||
===Defaulting Party=== | |||
Under an {{isdaprov|Event of Default}}, it is the {{isdaprov|Non-Defaulting Party}} at all times (since on the theory of the game, the {{isdaprov|Defaulting Party}} is either a miscreant or a smoking hulk of twisted metal, there is no one else around to do this. Therefore, it being an {{isdaprov|Event of Default}} is always optimal for the {{isdaprov|Innocent Party}}, since it will always be the {{isdaprov|Determining Party}}. | Under an {{isdaprov|Event of Default}}, it is the {{isdaprov|Non-Defaulting Party}} at all times (since on the theory of the game, the {{isdaprov|Defaulting Party}} is either a miscreant or a smoking hulk of twisted metal, there is no one else around to do this. Therefore, it being an {{isdaprov|Event of Default}} is always optimal for the {{isdaprov|Innocent Party}}, since it will always be the {{isdaprov|Determining Party}}. | ||
===One Affected Party=== | ===One Affected Party=== | ||
Where the terminating impetus is not so outrageous as to qualify as an {{isdaprov|Event of Default}} — i.e., it is only a Termination Event — but it only impacts one party, in most cases it is the same as for an Event of Default. There is one Affected Party, the Non-Affected Party is the sole Determining Party, so it closes out on its own side of the market ... ''unless the event in question is an Illegality or a Force Majeure Event'', in which case there is a rider in Section 6(e)(ii)(3) applies and the Determining Party has to get mid market quotations that don’t take creditworthiness into account. | Where the terminating impetus is not so outrageous as to qualify as an {{isdaprov|Event of Default}} — i.e., it is only a Termination Event — but it only impacts one party, in most cases it is the same as for an Event of Default. There is one Affected Party, the Non-Affected Party is the sole Determining Party, so it closes out on its own side of the market ... ''unless the event in question is an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure Event}}'', in which case there is a rider in Section {{isdaprov|6(e)(ii)(3)}} applies and the {{isdaprov|Determining Party}} has to get mid market quotations that don’t take its own creditworthiness into account. But note that the most commonly triggered type of Termination Event is an {{isdaprov|Additional Termination Event}}, these tend to have a defaulty, turpidudinous character about them, almost never happen to two people at once, and therefore behave exactly like Events of Default. | ||
===Two Affected Parties=== | |||
When both parties are affected — a scenario the ISDA only contemplates for {{isdaprov|Termination Event}}s; {{isdaprov|Events of Default}} being more of a “she who draws first wins” sort of affair, where the first in time prevails — then each party is a “Determining Party” calculates its ''own'' close-out value — in our nutshell terms, “the losses the {{isdaprov|Determining Party}} would incur (positive) or gains it would realise (negative) in replacing the material terms and the option rights of the parties under a {{isdaprov|Terminated Transaction}}” — throws it into the ring and the {{isdaprov|Calculation Agent}} splits the difference. Assuming both parties calculate so the end result is necessarily a mid-market | When both parties are affected — a scenario the ISDA only contemplates for {{isdaprov|Termination Event}}s; {{isdaprov|Events of Default}} being more of a “she who draws first wins” sort of affair, where the first in time prevails — then each party is a “Determining Party” calculates its ''own'' close-out value — in our nutshell terms, “the losses the {{isdaprov|Determining Party}} would incur (positive) or gains it would realise (negative) in replacing the material terms and the option rights of the parties under a {{isdaprov|Terminated Transaction}}” — throws it into the ring and the {{isdaprov|Calculation Agent}} splits the difference. Assuming both parties calculate so the end result is necessarily a mid-market | ||
Revision as of 13:02, 26 September 2022
The financial difference between an Affected Party and a Defaulting Party
What is the practical, economic difference between being closed out on the same transaction for an Event of Default and a Termination Event? This is something that all ISDA ninjas know, or sort of intuit, in a sort of semi-conscious, buried-somewhere-deep-in-the-brain-stem kind of way, but they may mutter darkly and try to change the subject if you ask them to articulate it.
This might be of chiefly academic interest were it not for the unfortunate habit of the same real world event potentially comprising more than one variety of termination right. This leads to some laboured prioritisation in the ISDA, and sometimes some in the Schedule too.
So, with feeling, here it is:
The Definition of Close-out Amount
Remember the way a Determining Party values a Terminated Transaction is calculates its own close-out value — in our nutshell terms, “the losses the Determining Party would incur (positive) or gains it would realise (negative) in replacing the material terms and the option rights of the parties under a Terminated Transaction”. One assesses “the costs one would incur” from ones’ own side of the market. A large party of the question comes down to who the Determining Party is for a given termination event.
Defaulting Party
Under an Event of Default, it is the Non-Defaulting Party at all times (since on the theory of the game, the Defaulting Party is either a miscreant or a smoking hulk of twisted metal, there is no one else around to do this. Therefore, it being an Event of Default is always optimal for the Innocent Party, since it will always be the Determining Party.
One Affected Party
Where the terminating impetus is not so outrageous as to qualify as an Event of Default — i.e., it is only a Termination Event — but it only impacts one party, in most cases it is the same as for an Event of Default. There is one Affected Party, the Non-Affected Party is the sole Determining Party, so it closes out on its own side of the market ... unless the event in question is an Illegality or a Force Majeure Event, in which case there is a rider in Section 6(e)(ii)(3) applies and the Determining Party has to get mid market quotations that don’t take its own creditworthiness into account. But note that the most commonly triggered type of Termination Event is an Additional Termination Event, these tend to have a defaulty, turpidudinous character about them, almost never happen to two people at once, and therefore behave exactly like Events of Default.
Two Affected Parties
When both parties are affected — a scenario the ISDA only contemplates for Termination Events; Events of Default being more of a “she who draws first wins” sort of affair, where the first in time prevails — then each party is a “Determining Party” calculates its own close-out value — in our nutshell terms, “the losses the Determining Party would incur (positive) or gains it would realise (negative) in replacing the material terms and the option rights of the parties under a Terminated Transaction” — throws it into the ring and the Calculation Agent splits the difference. Assuming both parties calculate so the end result is necessarily a mid-market