Template:Isda 3(d) summ

The fabulous Section {{{{{1}}}|3(d)}} representation, giving one’s counterparty the right to close out should any so-designated representations turn out not to be true. This is sure to occupy an inordinate amount of your negotiation time — in that it occupies any time at all — because you are as likely to be hit in the face by a live starfish in the Gobi Desert as you are to close out an ISDA Master Agreement because your counterparty is late in preparing its annual accounts. But that’s a personal view and you may not rely on it.

The {{{{{1}}}|3(d)}} representation, in the documents for delivery table in the Schedule, therefore covers only the accuracy and completeness of {{{{{1}}}|Specified Information}} and not (for example) whether {{{{{1}}}|Specified Information}} is delivered at all. For that, see Section {{{{{1}}}|4(a)}} - {{{{{1}}}|Furnish Specified Information}}.

“Covered by the Section {{{{{1}}}|3(d)}} Representation”

If one is required to “furnish” {{{{{1}}}|Specified Information}} under Section {{{{{1}}}|4}}, two things can go wrong:

No show

One can fail to provide it, at all, in which case there is a {{{{{1}}}|Breach of Agreement}}, but be warned: the period before one can enforce such a failure, judged by the yardstick of modern financial contracts, is long enough for a whole kingdom of dinosaurs to evolve and be wiped out; or

It’s cobblers

One can provide the {{{{{1}}}|Specified Information}}, on time, but it can be a total pile of horse ordure. Now, here is a trick for young players: if your {{{{{1}}}|Specified Information}} is, or turns out to be, false, you have no remedy unless you have designated that it is “subject to the Section {{{{{1}}}|3(d)}} representation”. That is the one that promises it is accurate and not misleading.

Might Section 3(d) not cover a representation?

Now you might ask what good an item of {{{{{1}}}|Specified Information}} can possibly be, if Section {{{{{1}}}|3(d)}} didn’t apply and it could be just made up on the spot without fear of retribution — as a youngster, the JC certainly asked that question, and has repeated it over many years, and is yet to hear a good answer — but all we can presume is that in its tireless quest to cater for the unguessable predilections of the negotiating community, ISDA’s crack drafting squad™ left this preposterous option open just in case. It wouldn’t be the first time.

Legal opinions, and Credit Support Documents

A trawl through the SEC’s “Edgar” archive reveals that the sorts of things to which “Covered by Section 3(d) Representation” results in a “No” outcome are rare — but not non-existent. It is things like “Legal opinion from counsel concerning due authorization, enforceability and related matters, addressed to the other party and reasonably acceptable to such other party”, or “{{{{{1}}}|Credit Support Document}}s”.

The predictable response is for the counterparty to say, “look: I’m not a lawyer, okay, so it can hardly be on me if the legal advice I get in good faith happens to be wrong?”

This may be expressed to you, dissonantly, in the honeyed prose of a private practice lawyer — a vernacular foreign to most ISDA negotiators. You may wonder whether it has not been disingenuously spoon-fed to your counterpart by just such a fellow. We will not speculate. But we will observe that, while it may seem compelling at first, it is bad logic. It presumes that what matters is the probity with which a counterparty conducts itself; that it acts in good faith and with a benign disposition; that its “good chapness” and the basic honesty it shows when dealing with its market counterparties is beyond impunity.

But this is a commercial contract, friends. There are no ethicists in a foxhole. Moral judgments are beside the point. What matters is economic consequences of an untruth — the actus reus, not one’s mens rea in uttering it. If I have engaged in a trading arrangement with you on the presumption that you are appropriately permissioned, licenced, and constitutionally able to enter into valid and binding swap contracts, and you satisfy that condition by proffering the legal opinion of some respectable attorney-about-town who says it is true, and that attorney turns out to be wrong, my commercial position is no less parlous just because you weren’t to know your legal advisor was a clot. I am now facing a counterparty whose obligations to me may not be enforceable, or may be suspended at any minute. I want out. I might wish you well and bitterly regret it were not otherwise, but it is not otherwise. I need out. If that causes you some embarrassment, inconvenience or financial loss, then the person to whom you should look is your lawyer.

Not for the first time, the “legal standard,” for no reason other than it is a legal question, and there is no-one else around qualified to gainsay it, is crafted to suit the personal interests of the opinining legal commumnity. Have no truck with this, fellows.

Annual reports

The other little fiddle — and it is a little fidgety fiddle — is to remark of annual reports that, yes, they are covered by that Section 3(d) representation, but with a proviso:

“Yes; provided that the phrase “is, as of the date of the information, true, accurate and complete in every material respect” in Section {{{{{1}}}|3(d)}} shall be deleted and the phrase “fairly presents, in all material respects, the financial condition and results of operations as of their respective dates and for the respective periods covered thereby” shall be inserted in lieu thereof.”

As to these all, we go into further detail in the section below.