Accuracy of Specified Information - ISDA Provision
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ISDA Anatomy™
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The fabulous Section 3(d) representation, giving one’s counterparty the right to close out should any so-designated representations turn out not to be true. This is sure to occupy an inordinate amount of your negotiation time — in that it occupies any time at all — because you are as likely to be hit in the face by a live flying starfish in the driest part of the Gobi Desert as you are to close out an ISDA because your counterparty is late preparing its annual accounts. But that’s a personal view and you may not rely on it.
The fabulous Section {{{{{1}}}|3(d)}} representation, giving one’s counterparty the right to close out should any so-designated representations turn out not to be true. This is sure to occupy an inordinate amount of your negotiation time — in that it occupies any time at all — because you are as likely to be hit in the face by a live starfish in the Gobi Desert as you are to close out an ISDA Master Agreement because your counterparty is late in preparing its annual accounts. But that’s a personal view and you may not rely on it.
The {{{{{1}}}|3(d)}} representation, in the documents for delivery table in the Schedule, therefore covers only the accuracy and completeness of {{{{{1}}}|Specified Information}} and not (for example) whether {{{{{1}}}|Specified Information}} is delivered at all. For that, see Section {{{{{1}}}|4(a)}} - {{{{{1}}}|Furnish Specified Information}}.
“Covered by the Section {{{{{1}}}|3(d)}} Representation”
If one is required to “furnish” {{{{{1}}}|Specified Information}} under Section {{{{{1}}}|4}}, two things can go wrong:
No show: One can fail to provide it, at all, in which case there is a {{{{{1}}}|Breach of Agreement}}, but be warned: the period before one can enforce such a failure, judged by the yardstick of modern financial contracts, is long enough for a whole kingdom of dinosaurs to evolve and be wiped out; or
It’s cobblers: One can provide the {{{{{1}}}|Specified Information}}, on time, but it can be a total pile of horse ordure. Now, here is a trick for young players: if your {{{{{1}}}|Specified Information}} is, or turns out to be, false, you have no remedy unless you have designated that it is “subject to the Section {{{{{1}}}|3(d)}} representation”. That is the one that promises it is accurate and not misleading.
Might Section 3(d) not cover a representation?
Now you might ask what good an item of {{{{{1}}}|Specified Information}} can possibly be, if Section {{{{{1}}}|3(d)}} didn’t apply and it could be just made up on the spot without fear of retribution — as a youngster, the JC certainly asked that question, and has repeated it over many years, and is yet to hear a good answer — but all we can presume is that in its tireless quest to cater for the unguessable predilections of the negotiating community, ISDA’s crack drafting squad™ left this preposterous option open just in case. It wouldn’t be the first time.
Legal opinions, and Credit Support Documents
A trawl through the SEC’s “Edgar” archive[1] reveals that the sorts of things to which “Covered by Section 3(d) Representation” results in a “No” outcome are rare — but not non-existent. It is things like “Legal opinion from counsel concerning due authorization, enforceability and related matters, addressed to the other party and reasonably acceptable to such other party”, or “{{{{{1}}}|Credit Support Document}}s”.
See further discussion in the sections below.
Annual reports
The other little fiddle — and it is a little fidgety fiddle — is to remark of annual reports that, yes, they are covered by that Section 3(d) representation, but with a proviso:
“Yes; provided that the phrase “is, as of the date of the information, true, accurate and complete in every material respect” in Section {{{{{1}}}|3(d)}} shall be deleted and the phrase “fairly presents, in all material respects, the financial condition and results of operations as of their respective dates and for the respective periods covered thereby” shall be inserted in lieu thereof.”
Note that the 3(d) representation, in the ISDA documents for delivery table in the Schedule, therefore covers only the accuracy, completeness of Specified Information and not (for example) whether it is delivered at all or not. For that, see Section 4(a) - Furnish Specified Information. Template:Commonnegpoints Opposing negotiators may try to crowbar in something like this, to satisfy their yen to make a difference and please their clients with their acumen and commercial fortitude:
- “or, in the case of financial information, a fair representation of the financial condition of the relevant party, provided that the other party may rely on any such information when determining whether an Additional Termination Event has occurred.”
This is predicated on the following reasoning: “In publishing the audit, the auditor itself is not making any greater representation than that the statements are a fair representation of the financial conditions. I’m no accountant. I didn’t even write the stupid audit. How am I supposed to know? Why should I give any a stronger representation than the expert?”
Fair questions, but they misapprehend what is being asked.The riposte is this:
The Part 3 information you must supply is “Party B’s annual audited financial statements.” So the representation we are after is that you have handed over a fair, accurate and complete copy of those audited statements, not that the statements themselves, as prepared by the auditor are necessarily fair, accurate and complete. To get that comfort, we have the auditor’s own representation of the company’s financial condition, and we don’t need yours.}}
Not providing documents for delivery is an Event of Default ... eventually
The importance of promptly sending required documents for delivery goes as follows:
- By dint of Section {{{{{1}}}|4(a)}} you agree to furnish each other {{{{{1}}}|Specified Information}} set out in {{{{{1}}}|Part 3}} of the {{{{{1}}}|Schedule}}.
- By dint of Section {{{{{1}}}|5(a)(ii)}} if you don’t then that can be a {{{{{1}}}|Breach of Agreement}} {{{{{1}}}|Event of Default}} (Section {{{{{1}}}|5(a)(ii)}}). Be warned: you must pursue a tortured chain of nested double negatives and carefully parse the interplay between Sections {{{{{1}}}|4(a)}} and {{{{{1}}}|5(a)(ii)}} to grasp this, but it is true.
- But, Section {{{{{1}}}|5(a)(ii)}} imposes a thirty freaking day grace period following notice before a {{{{{1}}}|Breach of Agreement}} counts as an {{{{{1}}}|Event of Default}} allowing termination. (A {{{{{1}}}|Failure to Pay or Deliver}} is excluded from that definition, by the way, because it has its own EOD with a much tighter grace period).
- So if you need a document “furnished” urgently and can’t wait a month for it (you might not, if you are a credit officer and it is a monthly NAV statement, for example) then you must upgrade a simple {{{{{1}}}|5(a)(ii)}} {{{{{1}}}|Breach of Agreement}} to a full-blown {{{{{1}}}|Additional Termination Event}}.