No event of default or potential event of default
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Representations and Warranties Anatomy™
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Can you understand the rationale for this representation: Sure. Does it make any practical sense? It does not. A No EOD rep is a classic loo paper rep: soft, durable, comfy, absorbent — super cute when a wee Labrador pub grabs one end of the streamer and charges round your Italian sunken garden with it — but as a credit mitigant or a genuine contractual protection, only good for wiping your behind on.
Firstly, you are asking someone — on pain of them being found in fundamental breach of contract — to swear to you they are not already in fundamental breach of contract. Now how much credibility can you place one someone in that case? How much comfort can you genuinely draw from that specific promise? Wouldn't it be better if your credit team did some cursory due diligence to establish whether there are any grounds to think your counterparty is in fundamental breach of contract? Presuming that no such information is available — folks tend not to publicise their own defaults on private contracts, after all, the real question here is “Do I trust my counterparty?” And to that question, any answer provided by exactly the person whose trustworthiness your equiry is designed to test, carries exactly no informational value.
Secondly, let’s say it turns out your Counterparty was lying; there was an extant or pending event of default. Now what are you going to do? Bleed on him?
“... or would occur as a result of entering into this agreement”
A curious confection, you might think: what sort of event of default could a fellow trigger merely by entering into an ISDA Master Agreement with me? Well, remember the ISDA’s lineage. It was crafted, before the alliance of men and elves, by the Children of the Forest. They were a species of pre-derivative, banking people. It is possible they had in mind the sort of restrictive covenants a banker might demand of a borrower with a look of softness about its credit standing: perhaps a promise not to create material indebtedness to another lender, though in these enlightened times that would be a great constriction indeed on a fledgling enterprise chasing the world of opportunity that lies beyond its door.
So, does a swap mark-to-market exposure count as indebtedness? Many will recognise this tedious question as one addressed at great length when contemplating a Cross Default: Suffice, here, to say that an ISDA isn’t “borrowed money”[1] as such, but a material swap exposure would have the same credit characteristics as indebtedness. But in these days of compulsory variation margin you wouldn’t expect one’s mark-to-market exposure to be material, unless something truly cataclysmic was going on intra-day in the markets.
Much more likely is a negative pledge, and while an unsecured, title-transfer, close-out netted ISDA might not offend one of those, a Pledge GMSLA might, and a prime brokerage agreement may well do.
But still, nonetheless, see above: if it does, and your counterparty has fibbed about it, all you can do is get out your tiny violin.
- ↑ Unless your credit team decided to define it as such, of course. It does happen.