Master agreement genealogy
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Negotiation Anatomy™
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The different approaches to events of default between master agreements on one hand, the full metal jacket of the ISDA Master Agreement against the unbearable lightness of being of the 2010 GMSLA and Global Master Repurchase Agreement is an interesting illustration of the “path dependency” of those agreements and their genealogy.
On the genealogy of ISDAs
The ISDA Master Agreement (we are talking about the 1987 ISDA and even the 1985 ISDA Code) was spun from the tiny fingers of those primordial Children of the Forest — the loans forest, that is: early swaps were seen as off-setting loan contracts between counterparties — where Transactions were expected to be bespoke, of long tenor, unmargined (variation margin only really because common with the 1994 NY CSA and 1995 CSA), periods of months without payments.
Thus, one’s ability to accelerate by reference to independent credit events hasppening to one’s counterparty in the market (like Cross Default) or relating to other trading contracts between one and one’s counterparty (like DUST) was regarded as important. But like a lot of other things, times have changed since the late eighties. The nature of swap trading has matured, as volumes have exploded, the vibe has markedly shifted towards daily margin, many payments going back and forth each day, very little risk of going for months between coupon payments but riding massive MTM exposures, and with nothing to hang a Failure to Pay on. If swaps ever did present before Doctor Risk as dolled up loan exposures, they don’t now. Yet, Cross Default and DUST remain baked into the ISDA Master Agreement’s exoskeleton rather like a coccyx or tonsils: a residual evolutionary vestige of a prior ecosystem now largely vanished.
But good luck explaining that to the chief credit risk officer, who last looked in anger at a swap agreement in 1995.
On the genealogy of securities finance
Repos and stock loans, by contrast, were always naturally of short tenor (stock loans are callable on notice), were daily margined from the outset, so there was never an identified need for Cross Default or DUST in the first place. As securities financing transactions have matured in complexity, there has been some drift towards longer tenors (stock loans out to term, and long-dated repo) - but daily margin has remained and most — though not all; there are some nervous Nellies out there, who shall remain nameless, to preserve my identity — have resisted the temptation to inject loan-style default events.
See also
Events of Default under the GMSLA Events of Default under the GMRA