Undead ISDA
The status of every defunct ISDA master agreement, once all transactions have terminated, whether through the exigencies of a stressed close-out, or simply through the entropy and general lassitude of a modern life in which many erstwhile ISDA devotees grew bored, or adversely regulated, and gave up on swaps, or just let the last remaining Transactions to roll off and scamper, free, into the fragrant meadows of oblivion, leaving the rusting hulk of a master agreement extant, dilapidating, attracting weeds, vermin and adolescent dope smokers and gradually leeching it's crumbling toxins into the soil.
Every now and then someone like Parsons, that pedantic oik from from credit, will stop by your desk, eyes a-glitter, drop a sheaf upon it and ask, casually, if you can do the necessary to terminate this defunct ISDA.
“You know, send out a 6(g) notice or something.”[1]
If, like JC, you find the credit department’s penchant for stupid notices particularly irksome, you will enjoy composing and equally nonchalant reply.
“No”.
“I beg your pardon?”
“Well, no. I’m afraid the answer is no.”
For while you can terminate a Transaction under an ISDA Master Agreement — and all of them at once, if things really come to that — none of its printed forms envisages the parties terminating the master agreement itself.[2] Not even upon a closeout.
There is no contractual right to terminate on notice
Alone in the firmament of finance relationship contracts the ISDA Master Agreement has no general no-fault termination provisions.[3] It cannot be unilaterally killed off. So, unless you and your counterparty can confect a means between you of putting the old bag down — and for that you will need the communion wine, garlic, wooden stakes and so on of consensus — a discarded ISDA arrangement will just lie there, locked-in, mute, transfixed, plastered to the infinite like some ghostly apparition, frozen at the event horizon of financial probity for ever — surviving, indefinitely, some say even beyond the mortal existence of they whose trading relationship it once described.
This unnerves those of delicate or superstitious mien. For if it is still there, however immobile, can it not cause mass destruction through inattention?
Normally it does not matter
Some would say this is a trifle ; a curio, but ultimately a non-point — as unalive as the ISDA that presents it. For an ISDA Master Agreement, under which there are no extant Transactions, of itself carries no financial obligations. It presents no risk. It is as safe as a rusty Luger with the firing pin removed.
If no Transactions remain that one can close out, what earthly concern is it, for either party, if notional non-payment obligations go unfulfilled? What kind of paranoid weirdo would take the point that one’s continuing covenants — to send annual reports within three months of their publication, for good example — are being broken?[4] And what of those financial meta-obligations? That two-edged Cross Default clause? Could it ... ?
You may laugh, but note only this: they who so haughtily wave such trifles away yet still go quiet and dare not speak of the Dark Lord of the Swaps.
When it sort of does matter
JC is blessed with inquisitive m, thoughtful correspondents, and one recently raised this hypothetical:
What if I have posted a static, upfront Independent Amount under Credit Support Annex in the traditional fashion, not as an amount specifically tied to a transaction but an independent payment as collateral under the ISDA Master Agreement itself. How do I get that back, if I can’t terminate the ISDA)?
This is a very good, if theoretical, point. Well — JC thought it was technical: surely, no-one in this day and age demands genuinely independent Independent Amounts, do they? — but apparently they do. Swap dealers may, as consideration for even opening a credit line in the first place, before even trading upon it, ask prospective customers to deposit a wodge of cash or securities as general collateral. Particularly, we hear, corporate and non-financial end users whose bona fides the dealer has difficulty assessing. It seems perverse — a reversal of the natural order of things in which it is typically dealers who provide finance to their customers — but there we have it: as a price of entering the derivatives trading game you might have to stump up half a mill in hard folding stuff to your dealer.
Strictly, that cash is deposited under the CSA and not the ISDA proper — though that is a fine distinction indeed if the CSA counts as a Transaction under the ISDA Master Agreement[5] — and in any case it is academic, as the CSA doesn’t have any termination provisions in it either.
So, questions: firstly if all my existing business has rolled off and I don’t intend to trade again, can I get my Independent Amount back? There is a theoretical issue to this and a practical one. The practical one is, yes, of course: if you notify your dealer that you intend to shut up shop, it will shut its credit lines, close down its client relationship and return any independent amounts and any other sums it happens to be holding as collateral against your obligations to it.
See also
- Early Termination under the ISDA Master Agreement
- No-fault termination
- The Good Man
- The Dark Lord of the Swaps
References
- ↑ This is a little in-joke. There is no Section 6(g) notice. Senior silver bulleters from credit often bluff revealingly about ISDA terms.
- ↑ There are reasons for this, but they are tedious: If you terminate the whole agreement, not just the Transactions under it, then how are all those clever close out mechanics meant to work?
- ↑ The GMSLA, (Clause 16) OSLA (Clause 15) GMRA (16) all have Termination provisions.
- ↑ Only a person yet to meet an internal auditor could ask that question.
- ↑ For the labored story of when a CSA is and is not a “Transaction” under an ISDA Master Agreement, see Credit Support Document.