Template:Csa Miscellaneous summ

“Good faith and commercially reasonable manner” as a general standard

Whether a merchant should commit himself to dealing in good faith, or in a commercially reasonable manner, or both, is one that vexes many of our learned friends. Especially those in America. The only discomfort it should occasion is to a solicitor’s livelihood, for this magic expression, while doing no more than articulating the commercial imperative and the basic commercial outlook of a good egg, puts many a tedious negotiation to the sword.

Everyone benefits but officers of Her Majesty's — or (cough) the People’s — courts.

“In good faith and a commercially reasonable manner” cuts the crap and promises to unlock some negotiations and take the tedious line-by-line muck-raking out of others.

There is a certain kind of legal negotiator apt to see phantoms and ghosts at every turn. He has a bleak vision indeed of a counterparty’s general commercial aspirations for his organisation.

“What if,” he will say, “your traders mendaciously use this clause to bring about my firm’s misfortune in a way I – er – cannot now anticipate?” (This fellow’s imagination tend to be fantastical in the abstract, but rather prosaic in the particular).

Such a chap is often placated by the magical expression “acting in good faith and a commercially reasonable manner”. It may help persuade him across that wobbly bridge to consensus. Many a time it has helped the JC get home in time for supper.

Litigation risk: The one argument against the general principle is that it is inherently vague and therefore a source of potential dispute in itself, even if we always exercise our rights reasonably and in good faith. But come now — it only presents litigation risk to clients who don’t trust you — and here you have bigger problems, frankly — or for those whom you don’t trust — also not without issues. Here, your problem is not the good faith obligation; it’s that you have a lousy client relationship. It hardly affects litigation risk in any case: An unhappy client will take action either way, and will argue a lack of good faith in any case.

A contract is a bond of trust. How would a merchant explain to his counterparty that he wished to reserve for himself the right to act in bad faith?

As for commercial reasonableness, and that objection I can already see you formulating that it admits shades of doubt, and encourages litigation — well, for you the great case of Barclays v Unicredit should be a source of succour. And for you Americans, for whom Barclays v Unicredit is of persuasive value only, there is the fact that “in good faith and a commercially reasonable manner” is written into the Uniform Commercial Code should bend your ear: if it is okay there — and in the 2016 NY Law VM CSA — why not elsewhere?

In any case, whatever your contract says, if a court finds you have acted wantonly, or in bad faith, do not expect much sympathy when you argue that, by the contract, you were entitled to.

Legally ineligible Credit Support

New for the regulatory margin CSAs

There is no such concept in the ancient CSAs, concerning as it does legal and not contractual ineligibility of credit support, and that being a function of criteria imposed by regulators on one’s mandatory obligations to post and collect margin, which did not exist before 2016, it is hardly surprising ISDA’s crack drafting squad™ of yore didn’t anticipate the need for this clause, which is convoluted, finnicky, and you can avoid the need for it entirely, should you post cash in a sensible currency.

Regulatory margin title transfer CSA vs security interest CSA

In most respects they are identical (with references to “Transferor” and “Transferee” switched to “Pledgor” and “Secured Party”). There are two technical differences, for completists:

• The exception in the 2016 VM CSA for Legally Ineligible Credit Support counting as Eligible Credit Support for the purpose of Credit Support Balance and Equivalent Credit Support. This is because, being a title transfer collateral arrangement, even though it is worth zero for the purposes of discharging one’s regulatory obligation to collect and return collateral, in the real world it is still worth something, and the Transferee still has to give it back, even if that has no effect on valuations under the 2016 VM CSA. With a 2016 NY Law VM CSA since the Secured Party never “gets” it in the first place, the Secured Party doesn’t have to give it back either. (By the way, if you aren’t saying, “hey, but what about rehypothecation under Paragraph 6(c)?” yet, you should be.)
• The exception for valuation on Default — that flows from the fundamental difference between the 2016 VM CSA a title transfer collateral arrangement which is a Transaction under the ISDA Master Agreement and the 2016 NY Law VM CSA which is a security financial collateral arrangement which is only a Credit Support Document under the ISDA Master Agreement.

Specification of certain matters

One from the “well, I’ll be blowed” school of legal expression wherein ISDA’s crack drafting squad™ states the bleeding obvious for the benefit of those timid types who — despite being schooled in its weft and warp — don’t quite trust the common law to deliver elementary common sense.

On the one hand, you can see where they’re coming from — this is the same common law which concluded that email is not an electronic messaging system, after all - but on the other hand come on.