Template:M summ 2018 CSD 13(h)

What an omnishambles. ISDA’s crack drafting squad™ may usually be tiresome, leaden in its literary style, and pernickety to the point of distraction, but one thing you can say for it is that it does, usually, do things properly. It is thorough. It leaves no stone unturned, even when you wish it rather had.

With this provision it looks like the ’squad got to the point of maximum disarray, with all rocks upturned and slaters, bugs and cockroaches scuttling everywhere, and it just had a tantrum and stormed off. These provisions don’t even make sense. They are not even grammatical.

What were they trying to achieve? go figure.

God only knows what they thought they were trying to achieve. Whatever remote objective they had as a goal, and whatever contingencies were dogging the ’squad’s fevered subconscious as they trudged, in formation, through the moist, dengue-infested swamps of of this drafting exercise — and there is some talk that there may have been skirmishes with pockets of rogue buy-side advisors to distract them as they went waded through the hip-high sludge — what is left to posterity is a confused, gibbering disaster.

What did they need to achieve? Straightforward

All this provision does is describe when a Secured Party can actually take the initial margin the Custodian (IM) is holding for it.

You should not be surprised to hear this should be, more or less, when the Chargor has actually defaulted and been closed out — and, really, the control of secured collateral held under Control Agreement would ordinarily be most suitably dealt by that Control Agreement. The clue, surely, is in the name?

Until the ISDA Master Agreement has been fully closed out and the Early Termination Amount — that is, the total amount due following termination and valuation of all Transactions following the default — determined, you don’t definitively know what you are owed — even if you are owed anything: only one party to an ISDA Master Agreement can be owed something, remember — so until then, what business have you got appropriating the Initial Margin? Nor do you have any credit risk over it: it is held at a third party and secured in your favour. Cool your jets.

But that event — by our read, a “Failure to Pay Early Termination Amount” — isn’t even the default value for a Secured Party Rights Event: rather, it is one of a tangled menu of alternatives.

Default value: designated Early Termination Date

The as-standard Secured Party Rights Event in the 2018 English law IM CSD is the designation of an Early Termination Date in respect of all Transactions following an Event of Default but — unless designated as an “Access Condition” — not a normal Termination Event or an Additional Termination Event. Just as a piece of design this is cruddy: it should be any event leading to the early termination of all outstanding Transactions, since at that point you are off risk, right? And before you complain that this is too wide, since there may still be amounts undetermined, or not as yet due under those transactions, well, yes: that is exactly why the Early Termination Date is the wrong trigger point in the first place.

Why do you need to appropriate Initial Margin before you know if you are actually owed anything?

But having a legal agreement that said something that straightforward would be too easy, and not nearly circuitous enough. How are you meant to keep armies of legal eagles employed if it is as straightforward as that?

So ISDA confused everything by adding a whole new range of “Access Conditions” — just in case these are different from actually executed close out events (why would they be?), and then confabulating, half-heartedly, all kinds of different triggers for this access.

For those who don’t trust Control Agreements to do what they say on the tin, consider this kind of wording:

“Secured Party Rights Event” means that, following the occurrence or designation of an Early Termination Date with respect to all outstanding Transactions, an Early Termination Amount payable by the Chargor has been determined and notified to the Chargor under Section 6(d), and the Chargor has not paid it in full when due under Section 6(d)(ii).