Template:Isda 5(a)(iii) general

For paranoia junkies and conspiracy theorists amongst you, note the long reach this event of default gives to a Cross Default provision. Now, granted, in the ordinary course Cross Default keys off borrowed money or indebtedness, and by common convention that does not count out-of-the-money exposures under derivative contracts, so the ISDA Master Agreement’s own events of default should not exacerbate your cross-default risk under other contracts. Unless you widen Specified Indebtedness to include derivative exposures, as some counterparties do.

Okay; buckle in, for this is a bit of a Zodiac Mindwarp. But...

Now we see that courtesy of Section 5(a)(iii), a default by a counterparty’s Credit Support Provider, which need not be a parent: it may be an unaffiliated third-party like a bank writing a letter of credit or financial guarantee may be default under the ISDA Master Agreement for the counterparty, even where the counterparty itself is fully solvent, in good standing, of sound credit and up-to-date with its rent, outgoings, credit card payments and so on. Fair enough, you might say, for that credit support was a fundamental part of the counterparty’s calculus when agreeing to trade swaps in the first place, and so it was — but the same event could be used by your other lenders or counterparties under different facilities, even ones not guaranteed by the same guarantor.