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In which JC ventures forth, unbidden, onto the topic of ''what makes a good ISDA''. Mainly the same things that make any | In which JC ventures forth, unbidden, onto the topic of ''what makes a good ISDA''. Mainly the same things that make ''any'' commercial contract good, but let’s not spoil a good story. | ||
The | The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to ''avoid'' controversy — it goes without saying “the sacred fourteen” are already immaculate: we mean, of course, what makes a good ISDA ''{{isdaprov|Schedule}}''. For it will be toiling over that grubby mortal [[appendix]] — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a [[negotiator]] will live out her days.<Ref>What is the difference between a schedule, an appendix and an annex?</ref> | ||
A scan of the sub-headings below will betray | A scan of the sub-headings below will betray JC’s view: it should have five basic qualities: ''fairness'', ''clarity'', ''consistency'', ''simplicity'' and aptness to instil ''confidence''. These qualities interact with and, in large part, depend on each other. | ||
''Fair'' agreements must be ''clear'' for customers to realise they are fair. | |||
''Clear'' agreements will inspire ''confidence'', in your own staff, thus distracting them from the temptations of [[Casanova principle|Casanova’s principle]] and toward ''fairness''. | |||
''Clarity'' and ''fairness'' lend themselves also to ''consistency'' since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object. | |||
''Clarity'', ''fairness'', ''confidence'' and ''consistency'' make for ''simplicity'': a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce. | |||
===Fairness=== | ===Fairness=== | ||
{{Quote|“There could be no negotiating with terrorists.” | {{Quote|“There could be no negotiating with terrorists.” | ||
:—Attributed to Richard Nixon}} | :—Attributed to Richard Nixon}} | ||
{{Drop|[[Qualities of a good ISDA|F]]|airness as an}} abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in | {{Drop|[[Qualities of a good ISDA|F]]|airness as an}} abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in [[alternative dispute resolution]] class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal [[negotiation]] as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so ''fairness'' never gets a chance to break out. | ||
This is, in theory, odd. Why the hostility? After all, between good-faith traders in the marketplace, commercial negotiation is no [[single round prisoner’s dilemma]]. To show fairness is not to show weakness, but ''strength''. We might have an answer by asking: [[cui bono]]?<ref>Usually, when JC asks this rhetorical question, the answer is the same: the [[agent]]. This is no exception.</ref> | |||
JC is, by lifelong experience, a [[sell-side]] guy: he comes at this from the perspective of a | JC is, by lifelong experience, a [[sell-side]] guy: he comes at this from the perspective of a business contracting with its customers. Merchant and customer are, generally, on the same side: at the limit their interests conflict, but gently: the merchant wants a [[commission]] or a mark-up, the customer wants a good price, but beyond that each wishes earnestly for the other’s continued prosperity. | ||
Things can get chewy at the extremes — but most customers never get near a [[tail event|chewy extreme]]. | Things ''can'' get chewy at the extremes — but most dealers and most customers never get near a [[tail event|chewy extreme]]. | ||
Sell-siders may occasionally engage with ostensible ''hostiles'' — competitors, for example — but when we do, there is an unspoken pact of [[good faith]] for the limited ends which have brought our warring sides together. We must, at some level, trust one other or at least have a common interest. If we did not, would not contract at all.<ref>[[David Graeber]] makes a fascinating point when discussing the ''non''-origin of currency out from [[barter]]: [[barter]] is an arm’s length trade of equivalent goods conducted between parties who are dispositionally ''rivals'' and not partners. Once the exchange happens, nothing is left on the table; there is no presumption of enduring goodwill, no expectation of further business, or any kind of obligation undischarged. A barter is an exchange conducted with untrusted aliens. Inside your community, where there is trust, we are less compelled to extract our precise pound of flesh: there is a give and take; we let obligations lie undischarged and they acquire a moral quality. These are the ties that bind — the imperative becomes to ''avoid'' fully discharging our dues to each other. This is the relationship we should aspire to with our customers. We trust them to pay later — we extend ''credit''. (Hence money emerged not from fair value barter with strangers but as a way of evidencing indebtedness amongst those who knew each other. You don't extend credit to aliens.</ref> | |||
So | So we presume [[good faith]] in any negotiation: ''some'' level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “{{plainlink|https://www.bbc.co.uk/iplayer/episode/m001w2dd/the-traitors-australia-series-2-episode-9|traitor’s dilemma}}”. This makes for good TV, but bad business. | ||
In any case, the “merchant-to-customer” contract is, by a landslide, the most common kind. Those with any [[ | In any case, the “merchant-to-customer” contract is, by a landslide, the most common kind. Once finalised, these are filed somewhere and never again reviewed, even should there later be an argument. Those with any [[inhouse counsel]] experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, when there isn’t — ''the business will roll over''. No-one takes a point with a [[Insolvency|solvent]] client. | ||
This is nothing more than common sense: you stand far more | This is nothing more than common sense: you stand to gain far more in future revenue by preserving your relationship even where that means excusing a customer the occasional gaffe than you do by taking a literal stance on technical errors. | ||
The instinct to | The instinct amongst business people to “just let it go” is so pronounced, indeed, that compliance teams have found ways to prevent this happening for fear it is seen as an impermissible “inducement”.<ref>Were it not for the deeply embedded [[agency problem]] inside most organisations, by dint of which these arrangements could well be, this would be a bit silly. As It is, it probably isn’t.</ref> | ||
In any case, the [[commercial imperative]] is so overwhelming a factor in ongoing business relationship that there is little point in asking for, let alone achieving, terms that go beyond “fair”. ''No-one will ever use them''. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — [[the ideal negotiation is no negotiation|the ideal negotiation is ''no'' negotiation]] — you should start with a fair template. | In any case, the [[commercial imperative]] is so overwhelming a factor in ongoing business relationship that there is little point in asking for, let alone achieving, terms that go beyond “fair”. ''No-one will ever use them''. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — [[the ideal negotiation is no negotiation|the ideal negotiation is ''no'' negotiation]] — you should start with a fair template. | ||
Make your templates ''fair''. | |||
===Confidence=== | ===Confidence=== | ||
{{Drop|Y|our form should}} also inspire confidence, | {{Drop|Y|our form should}} also inspire confidence, not fear, in your own negotiating team. It is a fact of life that negotiators these days have less combat experience and expertise than they once had. To do a good job they must be comfortable with their tools, not scared of them. They should ''understand'' the templates they use and the products they govern. They should go beyond the contract’s formal articulation to grasp the underlying commercial drivers of the relationship.<ref>JC is well aware that, among [[management consultant]]s, this view borders on the heretical.</ref> If they do, they can help you identify the parts of the contract that aren’t achieving what they seem to be. | ||
A negotiator who [[fear|''fears'']] her material will hide behind the formal rules you give her to manage it. She won’t be drawn to discuss anything live — if she doesn’t understand the form, why would she put her vulnerability on show? — so will hide behind her keyboard, contributing to the familiar experience of electronic trench warfare: she will lob long, bulleted issues lists over no-man’s-land and into the enemy’s advanced positions, or escalate that way internally to risk departments. When they land her missiles — missives? — will hiss and sputter, being passed about for days, before eventually being lobbed back, appended with yet more more bullets and annotated in [[BLOCK CAPITALS]] or a fetching {{Fontcolour|#FF00D4|'''hot pink'''}}. This impasse can go last, as it did in Ypres, for years. You could write [[strange negotiation|war poetry]] about it. | |||
Reverence to and intimidation by your own contractual form is madness, of course. While we should not be surprised, in our [[High modernism|high modernist]] times, that our overlords fetishise the [[Substance and form|form over substance]], ''deference'' to a contractual form that is plainly suboptimal is no cause for celebration. A confident negotiating team ''engages'' with the form rather than deferring to it. This is the negotiator’s version of “[[jidoka]]”: the “human touch” that makes the machine sing. | |||
Make sure your team have ''confidence'' in your forms. | |||
=== Clarity === | === Clarity === | ||
| Line 45: | Line 53: | ||
Closeout terms will only come into serious contemplation at times of extreme stress: the market’s, your management’s and, therefore, ''yours''. The more the firm stands to lose, the more extreme those stressy circumstances are likely to be. Your management will be going mad — make no bones about that — but so will the market and, quite possibly, the geopolitical situation too. All kinds of people will be doing inexplicable things. | Closeout terms will only come into serious contemplation at times of extreme stress: the market’s, your management’s and, therefore, ''yours''. The more the firm stands to lose, the more extreme those stressy circumstances are likely to be. Your management will be going mad — make no bones about that — but so will the market and, quite possibly, the geopolitical situation too. All kinds of people will be doing inexplicable things. | ||
Defaulting customers will be absent without official leave, responding to no communication channels at all. Bank chief executives won’t take each other’s calls. Prime Ministers will be ordering overseas embassies to max out their credit cards just to have cash on hand to meet the government’s obligations.<ref>This happened in New Zealand in 1981. [[Wage and price freeze|True story]]. </ref> Central bankers will be ordering the banks they regulate to lowball [[London Inter Bank Offered Rate|LIBOR]].<ref>Controversial, I know, but this seems increasingly likely to have been the case.</ref> | |||
We do not imagine that, when they crafted its close-out mechanics, the ’squad had the wider general ''ambiance'' in which the ISDA’s s last-resort rights would be exercised. They ''can’t'' have. We imagine they pictured the close-out urge coming upon the responsible credit officer, in isolation, at a time of beatific placidity: that there would be time and space to consider and quietly contemplate what must be done, perhaps with a frisson of regret for the poor customer whom one is letting down. | We do not imagine that, when they crafted its close-out mechanics, the ’squad had in mind the wider general ''ambiance'' in which the ISDA’s s last-resort rights would be exercised. They ''can’t'' have. We imagine they pictured the close-out urge coming upon the responsible credit officer, in isolation, at a time of beatific placidity: that there would be time and space to consider and quietly contemplate what must be done, perhaps with a frisson of regret for the poor customer whom one is letting down. | ||
''It will not be like that.'' | ''It will not be like that.'' | ||
| Line 53: | Line 61: | ||
There will be multiple counterparty failures at once. All kinds of things will be stretching your attention, and your management’s. There will be allegations — unproven, unverifiable, and likely false ''but at the time you won’t know it'' — of fraud, of dastardly dealing, of internecine conflicts within the client, of side-conversations with your CEO who is allegedly related to the chief investment officer by marriage, of predatory competitors beating you to the close-out punch and eating your lunch. All of this is the fog of war. | There will be multiple counterparty failures at once. All kinds of things will be stretching your attention, and your management’s. There will be allegations — unproven, unverifiable, and likely false ''but at the time you won’t know it'' — of fraud, of dastardly dealing, of internecine conflicts within the client, of side-conversations with your CEO who is allegedly related to the chief investment officer by marriage, of predatory competitors beating you to the close-out punch and eating your lunch. All of this is the fog of war. | ||
Even among those who had them in the first place, patience and a sense of humour will be in short supply. People — many, ''many'' people — will want short, clipped answers to different questions they are all shouting at you at once — ''to which there are no short, clipped answers''. If you even understand the question, the last thing anyone wants to hear by way of answer is, “ahhh, it’s ''complicated''” or, God forbid, “the contract is not clear.” | Even among those who had them in the first place, patience and a sense of humour will be in short supply. People — many, ''many'' people — will want short, clipped answers to different questions they are all shouting at you at once — questions ''to which there are no short, clipped answers''. If you even understand the question, the last thing anyone wants to hear by way of answer is, “ahhh, it’s ''complicated''” or, God forbid, “the contract is not clear.” | ||
And bet your bottom dollar, it will ''not'' be clear. | And bet your bottom dollar, it will ''not'' be clear. | ||
This, counsels, we think — and we are obliged to say the JC seems to be on his own about this one — short, clear, plain | This, counsels, we think — and we are obliged to say the JC seems to be on his own about this one — a discipline in times of fine weather and fecund trading conditions, to make sure your contracts have short, clear, plain and ''blunt'' termination language, with simple-to-follow events addressing only generally catastrophic circumstances. The day when you need your contracts will be omnishambles enough without disastrous, baffling contracts making it worse. | ||
Most of the weapons you need are embedded in the pre-printed form of the ISDA Master Agreement itself. Do not mess around with these. Try to resist the temptation to augment them, and have ready-at-hand a simple step-by-step guide to how to get through them without screwing anything up. | |||
Like [[Closing out an ISDA|'''this one''']]. | |||
Make your forms ''clear'' and easy to follow in moments of existential crisis. | |||
=== Consistency === | === Consistency === | ||
{{Drop|I|t helps with}} clarity if | {{Drop|I|t helps with}} clarity if, in a scrape, you know what your ISDA will say where it matters. You can be sure of this if you control quality where it matters. (Where it doesn’t — and with all the will in the world there are open tracts of most ISDA Schedules which will never have practical impact on anything, you can afford to take a view.) | ||
“This is all very well but how, JC, are we supposed to force a counterparty to take our credit terms? It is a competitive market! No-one in their right mind would do that! We must negotiate every time! And plus, we can’t stop our counterparties insisting on bespoke terms, you know: this is a client service business! We cannot dictate!” | “This is all very well but how, JC, are we supposed to force a counterparty to take our credit terms? It is a competitive market! No-one in their right mind would do that! We must negotiate every time! And plus, we can’t stop our counterparties insisting on bespoke terms, you know: this is a client service business! We cannot dictate!” | ||
Revision as of 18:53, 21 February 2024
In which JC ventures forth, unbidden, onto the topic of what makes a good ISDA. Mainly the same things that make any commercial contract good, but let’s not spoil a good story.
The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to avoid controversy — it goes without saying “the sacred fourteen” are already immaculate: we mean, of course, what makes a good ISDA Schedule. For it will be toiling over that grubby mortal appendix — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a negotiator will live out her days.[1]
A scan of the sub-headings below will betray JC’s view: it should have five basic qualities: fairness, clarity, consistency, simplicity and aptness to instil confidence. These qualities interact with and, in large part, depend on each other.
Fair agreements must be clear for customers to realise they are fair.
Clear agreements will inspire confidence, in your own staff, thus distracting them from the temptations of Casanova’s principle and toward fairness.
Clarity and fairness lend themselves also to consistency since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object.
Clarity, fairness, confidence and consistency make for simplicity: a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce.
Fairness
“There could be no negotiating with terrorists.”
- —Attributed to Richard Nixon
Fairness as an abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in alternative dispute resolution class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal negotiation as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so fairness never gets a chance to break out.
This is, in theory, odd. Why the hostility? After all, between good-faith traders in the marketplace, commercial negotiation is no single round prisoner’s dilemma. To show fairness is not to show weakness, but strength. We might have an answer by asking: cui bono?[2]
JC is, by lifelong experience, a sell-side guy: he comes at this from the perspective of a business contracting with its customers. Merchant and customer are, generally, on the same side: at the limit their interests conflict, but gently: the merchant wants a commission or a mark-up, the customer wants a good price, but beyond that each wishes earnestly for the other’s continued prosperity.
Things can get chewy at the extremes — but most dealers and most customers never get near a chewy extreme.
Sell-siders may occasionally engage with ostensible hostiles — competitors, for example — but when we do, there is an unspoken pact of good faith for the limited ends which have brought our warring sides together. We must, at some level, trust one other or at least have a common interest. If we did not, would not contract at all.[3]
So we presume good faith in any negotiation: some level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “traitor’s dilemma”. This makes for good TV, but bad business.
In any case, the “merchant-to-customer” contract is, by a landslide, the most common kind. Once finalised, these are filed somewhere and never again reviewed, even should there later be an argument. Those with any inhouse counsel experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, when there isn’t — the business will roll over. No-one takes a point with a solvent client.
This is nothing more than common sense: you stand to gain far more in future revenue by preserving your relationship even where that means excusing a customer the occasional gaffe than you do by taking a literal stance on technical errors.
The instinct amongst business people to “just let it go” is so pronounced, indeed, that compliance teams have found ways to prevent this happening for fear it is seen as an impermissible “inducement”.[4]
In any case, the commercial imperative is so overwhelming a factor in ongoing business relationship that there is little point in asking for, let alone achieving, terms that go beyond “fair”. No-one will ever use them. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — the ideal negotiation is no negotiation — you should start with a fair template.
Make your templates fair.
Confidence
Your form should also inspire confidence, not fear, in your own negotiating team. It is a fact of life that negotiators these days have less combat experience and expertise than they once had. To do a good job they must be comfortable with their tools, not scared of them. They should understand the templates they use and the products they govern. They should go beyond the contract’s formal articulation to grasp the underlying commercial drivers of the relationship.[5] If they do, they can help you identify the parts of the contract that aren’t achieving what they seem to be.
A negotiator who fears her material will hide behind the formal rules you give her to manage it. She won’t be drawn to discuss anything live — if she doesn’t understand the form, why would she put her vulnerability on show? — so will hide behind her keyboard, contributing to the familiar experience of electronic trench warfare: she will lob long, bulleted issues lists over no-man’s-land and into the enemy’s advanced positions, or escalate that way internally to risk departments. When they land her missiles — missives? — will hiss and sputter, being passed about for days, before eventually being lobbed back, appended with yet more more bullets and annotated in BLOCK CAPITALS or a fetching hot pink. This impasse can go last, as it did in Ypres, for years. You could write war poetry about it.
Reverence to and intimidation by your own contractual form is madness, of course. While we should not be surprised, in our high modernist times, that our overlords fetishise the form over substance, deference to a contractual form that is plainly suboptimal is no cause for celebration. A confident negotiating team engages with the form rather than deferring to it. This is the negotiator’s version of “jidoka”: the “human touch” that makes the machine sing.
Make sure your team have confidence in your forms.
Clarity
Of the many purposes of the ISDA, most deal with the present — desired capital treatment; the availability of close-out netting, margin obligations — and the past —representations and warranties, and conditions precedent to transacting and continuing to perform — but only one deals with the future. The close-out terms: the circumstance in which one can break the glass, sound the alarm and head for the lifeboats.
Closeout terms will only come into serious contemplation at times of extreme stress: the market’s, your management’s and, therefore, yours. The more the firm stands to lose, the more extreme those stressy circumstances are likely to be. Your management will be going mad — make no bones about that — but so will the market and, quite possibly, the geopolitical situation too. All kinds of people will be doing inexplicable things.
Defaulting customers will be absent without official leave, responding to no communication channels at all. Bank chief executives won’t take each other’s calls. Prime Ministers will be ordering overseas embassies to max out their credit cards just to have cash on hand to meet the government’s obligations.[6] Central bankers will be ordering the banks they regulate to lowball LIBOR.[7]
We do not imagine that, when they crafted its close-out mechanics, the ’squad had in mind the wider general ambiance in which the ISDA’s s last-resort rights would be exercised. They can’t have. We imagine they pictured the close-out urge coming upon the responsible credit officer, in isolation, at a time of beatific placidity: that there would be time and space to consider and quietly contemplate what must be done, perhaps with a frisson of regret for the poor customer whom one is letting down.
It will not be like that.
There will be multiple counterparty failures at once. All kinds of things will be stretching your attention, and your management’s. There will be allegations — unproven, unverifiable, and likely false but at the time you won’t know it — of fraud, of dastardly dealing, of internecine conflicts within the client, of side-conversations with your CEO who is allegedly related to the chief investment officer by marriage, of predatory competitors beating you to the close-out punch and eating your lunch. All of this is the fog of war.
Even among those who had them in the first place, patience and a sense of humour will be in short supply. People — many, many people — will want short, clipped answers to different questions they are all shouting at you at once — questions to which there are no short, clipped answers. If you even understand the question, the last thing anyone wants to hear by way of answer is, “ahhh, it’s complicated” or, God forbid, “the contract is not clear.”
And bet your bottom dollar, it will not be clear.
This, counsels, we think — and we are obliged to say the JC seems to be on his own about this one — a discipline in times of fine weather and fecund trading conditions, to make sure your contracts have short, clear, plain and blunt termination language, with simple-to-follow events addressing only generally catastrophic circumstances. The day when you need your contracts will be omnishambles enough without disastrous, baffling contracts making it worse.
Most of the weapons you need are embedded in the pre-printed form of the ISDA Master Agreement itself. Do not mess around with these. Try to resist the temptation to augment them, and have ready-at-hand a simple step-by-step guide to how to get through them without screwing anything up.
Like this one.
Make your forms clear and easy to follow in moments of existential crisis.
Consistency
It helps with clarity if, in a scrape, you know what your ISDA will say where it matters. You can be sure of this if you control quality where it matters. (Where it doesn’t — and with all the will in the world there are open tracts of most ISDA Schedules which will never have practical impact on anything, you can afford to take a view.)
“This is all very well but how, JC, are we supposed to force a counterparty to take our credit terms? It is a competitive market! No-one in their right mind would do that! We must negotiate every time! And plus, we can’t stop our counterparties insisting on bespoke terms, you know: this is a client service business! We cannot dictate!”
Quite so: and to get you through the livelong day we commend serenity’s prayer to you.
You cannot control everything, it is true. But there are some things you can control: the starting point for your own docs, for one thing — and some things certainly cannot be able to: the customer’s pet peeves.
But pet peeves have the general quality of being correct: few people are peeved at a failure to pay clause.
If you configure your human system to constantly sand off rough edges when you encounter them then these pet peeves serve as a kind of carborundum.
It is a curious fact that augmentations to a template — scar tissue from previous wounds —have a habit of sticking to your legal forms, whereas simplifications do not. This is a cultural matter. It is in your gift to change it. You just need to take hearts and minds with you.
If you start off with something you know to be offensive do not be surprised when they do not accept it.
A useful rhetorical, seldom posed, is:
If someone presented this term to me, would I accept it?
Rebase your documents to be acceptable to the person on the Clapham omnibus, at least in concept, from the off. Legal advisors are already incentivised to seek changes as a means of demonstrating their value. Why start with a form with which any sane advisor would have to take issue?
“Platinum plating”
A common gambit here is a sort of “quality triage”: it is a truism that a few special, “platinum” customers will generate disproportionate revenues for the firm, and a large morass will be reliable but unremarkable. The thinking goes that one should therefore offer “platinum” customers better terms than regular ones, to the point where some firms even offer different starting points to different clients.
In its unstated assumption that tedious legal wrangling is a kind of punishment for mediocrity, this has things precisely backward: platinum customers generate that colossal revenue by taking the most risk with the bank’s money. They may be better run, with more powerful systems and heavier infrastructure, but that doesn’t mean they can’t blow up, and if they do they will leave a much bigger crater. These are precisely the clients with whom your legal agreements should be strongest.
The converse is this: if your platinum client documentation is fit for the big risk-takers, then it is fit for everyone else too. You don’t need better terms with smaller fry. The purpose of legal documentation is sometimes opaque but it is not ritualistic punishment. Offering “platinum terms” to regular customers will also reduce how much time you spend — waste — haggling with customers who will present you less risk and generate less revenue.
Nor does lowering your starting bid weaken your negotiating position. Brokerage is not a zero-sum game. There are no points for securing stronger risk terms than you need — it does not necessarily translate to less risk — and your walk-away point remains your walk-away point however close you start to it. From a resourcing perspective, the sooner you get to agreement, or the walkaway point, the better.
And if you are diligent, consistent and rigorous in this approach, your customers and their advisors will figure this out. They will tire of banging their heads against a brick wall for the sake of improving what is already a reasonable position.
Simplicity
All else being equal, make it simple. This, of course, depends on your counterpart: you can’t clap one-handed, and a dogged pettifogger who takes pride in convolution — there are many of these — will not be assuaged by your best intentions, however noble. She will have her severability boilerplate, and that is that.
But Serenity’s Prayer is your friend, all the same. Sure; there are things you cannot change — bear them with good grace and a joyful heart — but just as many yet that you can: you may have to live with whatever pedantry is flung back to you but do not court it by needlessly complicating what you send out.
Convolution causes confusion. Confusion causes fear and requires explanation. Explanation leads — perhaps, eventually — to resolution, but takes time, burns resources, and comes at the cost of variance from your ideal. All this mucking around invites pedantry, should your counterparty’s advisers be given to pedantry. Lawyers, by nature, are given to pedantry.
In essence: having to explain something that could have been clear in the first place, without loss of emphasis is, at least, wasted energy.
Use plain language. Short sentences, modern language. Use “you must ~” rather than “Party B shall be obligated to ~”; Use “we may ~” rather than “Party A shall be entitled but, for the avoidance of doubt, not obliged to ~”.
Write agreeably. You have choices in how your institution expresses itself: these can influence the critical path of your negotiation. Don’t poke your customer with a sharpened stick. Take lessons from Dale Carnegie: try to win friends and influence people. There are polite, agreeable and damnable ways of saying the same thing.
Compare:
Customer shall be obliged forthwith upon demand and from time to time unconditionally to indemnify and hold the Bank harmless, without set-off, limitation or counterclaim, in the event the Bank or any one or more of its affiliates, agents, nominees or sub-custodians, howsoever described, suffers or incurs, or determines in its absolute discretion that it is or may be likely to suffer or incur, any custom, duty, excise, taxation, stamp or withholding, levy, deduction or charge of whatsoever nature, including penalties, costs, charges and legal expenses incurred in respect thereof, with regard to or in respect of any of Customer’s assets held by or in the name of or in the custody network of the Bank in connection with this Agreement or otherwise.
with:
“If we incur any tax while holding assets for you under this contract, you must reimburse us upon request.”
Simple, too, aids easy comprehension at a time when things are going to hell.
Almost all the tools you need are in the master. It bears repeating that, in these days of daily variation margin, it will be a rare day when your only option to close out a loss-making ISDA will be a NAV trigger or a key person clause.
- ↑ What is the difference between a schedule, an appendix and an annex?
- ↑ Usually, when JC asks this rhetorical question, the answer is the same: the agent. This is no exception.
- ↑ David Graeber makes a fascinating point when discussing the non-origin of currency out from barter: barter is an arm’s length trade of equivalent goods conducted between parties who are dispositionally rivals and not partners. Once the exchange happens, nothing is left on the table; there is no presumption of enduring goodwill, no expectation of further business, or any kind of obligation undischarged. A barter is an exchange conducted with untrusted aliens. Inside your community, where there is trust, we are less compelled to extract our precise pound of flesh: there is a give and take; we let obligations lie undischarged and they acquire a moral quality. These are the ties that bind — the imperative becomes to avoid fully discharging our dues to each other. This is the relationship we should aspire to with our customers. We trust them to pay later — we extend credit. (Hence money emerged not from fair value barter with strangers but as a way of evidencing indebtedness amongst those who knew each other. You don't extend credit to aliens.
- ↑ Were it not for the deeply embedded agency problem inside most organisations, by dint of which these arrangements could well be, this would be a bit silly. As It is, it probably isn’t.
- ↑ JC is well aware that, among management consultants, this view borders on the heretical.
- ↑ This happened in New Zealand in 1981. True story.
- ↑ Controversial, I know, but this seems increasingly likely to have been the case.