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Should a client request a {{{{{1}}}|transaction}}-specific parental {{{{{1}}}|guarantee}} (or [[letter of credit]]) for a {{{{{1}}}|Transaction}} under an {{isdama}} instead of the usual [[all obligations guarantee|“all obligations” guarantee]] of all the counterparty’s obligations under the {{isdama}}, hit the alarm button. | Should a client request a {{{{{1}}}|transaction}}-specific parental {{{{{1}}}|guarantee}} (or [[letter of credit]]) for a {{{{{1}}}|Transaction}} under an {{isdama}} instead of the usual [[all obligations guarantee|“all obligations” guarantee]] of all the counterparty’s obligations under the {{isdama}}, hit the alarm button. | ||
You should ''never'' agree to the {{{{{1}}}|guarantee}} of individual {{{{{1}}}|Transaction}}s (nor accept a [[letter of credit]] with respect to individual {{{{{1}}}|Transactions}}) under an {{isdama}}. If you do, because of the way {{isdama}}s are closed out under Section {{{{{1}}}|6(e)}} — or rather, '' | You should ''never'' agree to the {{{{{1}}}|guarantee}} of individual {{{{{1}}}|Transaction}}s (nor accept a [[letter of credit]] with respect to individual {{{{{1}}}|Transactions}}) under an {{isdama}}. If you do, because of the way {{isdama}}s are closed out under Section {{{{{1}}}|6(e)}} — or rather, ''aren’t'' closed out, you might find that just when you want your guarantee to pay, the {{{{{1}}}|Transaction}} it is guaranteeing isn’t there anymore: | ||
On a close-out, each {{{{{1}}}|Transaction}} is terminated, the individual close-out amounts are determined, they’re aggregated up to a single net sum (i.e. negative exposures are netted off against positive ones) and a single {{{{{1}}}|Close Out Amount}} is payable with respect to ''all terminated {{{{{1}}}|Transactions}}'' under {{{{{1}}}|6(e)}} ({{{{{1}}}|Payments on Early Termination}}) of the {{isdama}}.<ref>The {{isdama}} itself is never actually terminated, but carries impotently on in undead twilight, roaming the badlands like [[Nosferatu]] or the [[Flying Dutchman]], unloved, unredeemed, until the [[end of days]].</ref> | On a close-out, each {{{{{1}}}|Transaction}} is terminated, the individual close-out amounts are determined, they’re aggregated up to a single net sum (i.e. negative exposures are netted off against positive ones) and a single {{{{{1}}}|Close Out Amount}} is payable with respect to ''all terminated {{{{{1}}}|Transactions}}'' under {{{{{1}}}|6(e)}} ({{{{{1}}}|Payments on Early Termination}}) of the {{isdama}}.<ref>The {{isdama}} itself is never actually terminated, but carries impotently on in undead twilight, roaming the badlands like [[Nosferatu]] or the [[Flying Dutchman]], unloved, unredeemed, until the [[end of days]].</ref> | ||
That is to say, payments following termination of a Transaction are ''not'' payable under the {{{{{1}}}|Transaction}} at all - they are payable under the {{isdama}} itself. Therefore, if the [[guarantee]] relates to the single {{{{{1}}}|Transaction}}, at the point you wish to rely on it (i.e., upon the party’s default), it will have gone, with no payment required. Vanished, [[Tannhäuser Gate|like tears in the rain]]. <br> | That is to say, payments following termination of a {{{{{1}}}|Transaction}} are ''not'' payable under the {{{{{1}}}|Transaction}} at all - they are payable under the {{isdama}} itself. Therefore, if the [[guarantee]] relates to the single {{{{{1}}}|Transaction}}, at the point you wish to rely on it (i.e., upon the party’s default), it will have gone, with no payment required. Vanished, [[Tannhäuser Gate|like tears in the rain]]. <br> | ||
Revision as of 11:01, 1 October 2020
Guarantees and the ISDA Master Agreement: why {{{{{1}}}|Transaction}}-specific {{{{{1}}}|guarantee}}s don’t work
Should a client request a {{{{{1}}}|transaction}}-specific parental {{{{{1}}}|guarantee}} (or letter of credit) for a {{{{{1}}}|Transaction}} under an ISDA Master Agreement instead of the usual “all obligations” guarantee of all the counterparty’s obligations under the ISDA Master Agreement, hit the alarm button.
You should never agree to the {{{{{1}}}|guarantee}} of individual {{{{{1}}}|Transaction}}s (nor accept a letter of credit with respect to individual {{{{{1}}}|Transactions}}) under an ISDA Master Agreement. If you do, because of the way ISDA Master Agreements are closed out under Section {{{{{1}}}|6(e)}} — or rather, aren’t closed out, you might find that just when you want your guarantee to pay, the {{{{{1}}}|Transaction}} it is guaranteeing isn’t there anymore:
On a close-out, each {{{{{1}}}|Transaction}} is terminated, the individual close-out amounts are determined, they’re aggregated up to a single net sum (i.e. negative exposures are netted off against positive ones) and a single {{{{{1}}}|Close Out Amount}} is payable with respect to all terminated {{{{{1}}}|Transactions}} under {{{{{1}}}|6(e)}} ({{{{{1}}}|Payments on Early Termination}}) of the ISDA Master Agreement.[1]
That is to say, payments following termination of a {{{{{1}}}|Transaction}} are not payable under the {{{{{1}}}|Transaction}} at all - they are payable under the ISDA Master Agreement itself. Therefore, if the guarantee relates to the single {{{{{1}}}|Transaction}}, at the point you wish to rely on it (i.e., upon the party’s default), it will have gone, with no payment required. Vanished, like tears in the rain.
- ↑ The ISDA Master Agreement itself is never actually terminated, but carries impotently on in undead twilight, roaming the badlands like Nosferatu or the Flying Dutchman, unloved, unredeemed, until the end of days.