Guarantee: Difference between revisions
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===The perils of unilateral termination rights=== | ===The perils of unilateral termination rights=== | ||
A related point: be careful about allowing the [[guarantor]] a termination right, even if amounts owing before termination are meant to remain [[guarantee|guaranteed]]. For a [[mark-to-market]] exposure under a [[master agreement]], whither the guaranteed obligation? The [[mark-to-market]] exposure isn’t, of itself, an obligation, at least not until until the contract has been closed out. Until then it is an emergent property of all the live [[transaction|transactions]] under the [[master agreement]]. Nor are those transactions | A related point: be careful about allowing the [[guarantor]] a termination right, even if amounts owing before termination are meant to remain [[guarantee|guaranteed]]. For a [[mark-to-market]] exposure under a [[master agreement]], whither the guaranteed obligation? The [[mark-to-market]] exposure isn’t, of itself, an obligation, at least not until until the contract has been closed out. Until then it is an emergent property of all the live [[transaction|transactions]] under the [[master agreement]]. Nor are those transactions “existing obligations” in whole: each will comprise future obligations, which may be contingent, and in any case are not yet due. | ||
Consider providing for a lengthy notice period in such a termination period, which allows the [[beneficiary]] to adjust [[initial margin]] and precipitate a [[failure to pay]] (or rebase its [[credit support]] into tangible [[collateral]]). Alternatively make the termination of the [[master agreement]] a [[condition precedent]] to terminating the [[guarantee]]. | Consider providing for a lengthy notice period in such a termination period, which allows the [[beneficiary]] to adjust [[initial margin]] and precipitate a [[failure to pay]] (or rebase its [[credit support]] into tangible [[collateral]]). Alternatively make the termination of the [[master agreement]] a [[condition precedent]] to terminating the [[guarantee]]. |