Credit mitigation
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The controversial protections in master trading agreements are there for one reason: To stop you losing money. They’re “credit mitigants”:
Events of default
- If a party fails to pay or deliver things it owes under the agreement
- Things that increase the likelihood that the party will be unable to do so in the future:
- The party goes insolvent (or gets close to it)
- The party’s credit ratings are materially prejudiced (via a merger)
- The party materially defaults on its contracts with other counterparties
- Things that undermine the comfort you took as to the party’s creditworthiness:
- Representations and warranties the party gave turn out not to be true
- Any of these things happen with respect to guarantors or credit support providers.