Payments waterfall: Difference between revisions

Payments waterfall (view source)

Revision as of 13:03, 23 February 2023

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 #'''Residual amounts''': anything left — and for your common-or-garden repack there shouldn’t ''be'' anything left — goes to the issuer and is tossed into the pot and used for the Christmas party on Cayman Brac or something like that.
-==Rating agencies and the flip clause==
+==Rating agencies and the “flip clause”==
-It became ''a la mode'' in the dog days of the CDO market for rating agencies to require the priority as between the swap counterparty and the noteholders to be inverted upon a swap counterparty insolvency. The theory was simple enough: if the swap counterparty has been careless enough to default on its obligations, even if forced to by the vicissitudes of [[insolvency]] — then it should forgo its privileged place in the security waterfall, and should slum it with, or below, the Noteholders.
+It became ''a la mode'' in the dog days of the [[CDO]] market for rating agencies to require the priority as between [[Counterparty|swap counterparty]] and [[noteholder]]s to be inverted upon a swap counterparty insolvency — this is the so-called rating agency “flip” clause.
+The theory was simple enough: if a swap counterparty has been gauche enough to default on its contractual obligation, even if forced to by the vicissitudes of [[insolvency]] — and realistically, that is the only time a regulated swap dealer of the kind that has truck with [[repackaging]]s ''will'' default on its obligations — then it should forgo its privileged place in the security waterfall, and should slum it with, or ''below'', the Noteholders.
 At first blush this made sense, and seemed ''just'', in a “living my own truth” kind of a way, but on second glace the analysis rather falls apart. Contractual arrangements are not meant to be punitive, judgmental or even evaluative: they are what they are, and you get what you bargained for regardless of the good or bad grace of your counterparty, as long as it is around and able to perform for you.