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Borrowed money: Difference between revisions
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Borrowed Money is the main difference in scope between {{isdaprov|Cross Default}} and {{isdaprov|Default under Specified Transaction}} - the former includes it, the latter (unless you monkey around with your definition) does not. | Borrowed Money is the main difference in scope between {{isdaprov|Cross Default}} and {{isdaprov|Default under Specified Transaction}} - the former includes it, the latter (unless you monkey around with your definition) does not. | ||
== | ===Are {{t|stock loan}}s and {{t|repo}} trades “[[borrowed money]]”?=== | ||
Borrowed money is not generally defined. You know it when you see it. Quoth that sage old ''eminence gris'' Simon Firth, in his book [http://www.amazon.co.uk/Derivatives-Law-Practice-Simon-Firth/dp/0421830204 Derivatives Law and Practice]: | “[[Borrowed money]]” is not generally defined. You know it when you see it. Quoth that sage old ''eminence gris'' Simon Firth, in his book [http://www.amazon.co.uk/Derivatives-Law-Practice-Simon-Firth/dp/0421830204 Derivatives Law and Practice]: | ||
:“'''Borrowed money'''” is | :“'''Borrowed money'''” is ... means money which has been paid on the basis that it is to be repaid at a future date. '''It therefore excludes amounts that are due to ordinary trade creditors and financing arrangements (such as [[repo]]s and the discounting of bills of exchange)'''. | ||
Mr Firth cites {{Casenote|Transport & General Credit Corp.|Morgan}} [1939] CH 531 as authority for this point. | Mr Firth cites {{Casenote|Transport & General Credit Corp.|Morgan}} [1939] CH 531 as authority for this point. But there's a better reason: because of their respective collateral structures — both are daily [[Margin call|margined]] with a small [[haircut]] — neither involved significant indebtedness. The {{gmslaprov|Borrower}} of a [[stock loan]] typically gives up more in value of {{gmslaprov|Collateral}} than she “borrows” in stock. She isn’t ''really'' a borrower. | ||
:''“The task of the court in such cases is clear. It must first look at the nature of the transaction which the parties have agreed. If in form it is not a loan, it is not to the point to say that its object was to raise money for one of them or that the parties could have produced the same result more conveniently by borrowing and lending money. But if the court comes to the conclusion that the form of the transaction is only a sham and that what the parties really agreed upon was a loan which they disguised, for example, as a discounting operation, then the court will call it by its real name and act accordingly.”'' | Furthermore — and this is a tail-wags-dog argument, but still — it is important that [[repo]] and [[stock lending]] are excluded from the compass of {{isdaprov|Borrowed Money}}, because otherwise the {{isdaprov|Cross Default}} provisions of an {{isdama}} may be triggered by a failure under a repo. Even though they wouldn’t ordinarily be, even by another {{isdama}}. Also this nugget, per Lord Devlin in {{Casenote|Chow Yoong Hong|Choong Fah Rubber Manufactory}} [1962] AC 209: | ||
:''“The task of the court in such cases is clear. It must first look at the nature of the transaction which the parties have agreed. If in form it is not a [[loan]], it is not to the point to say that its object was to raise money for one of them or that the parties could have produced the same result more conveniently by borrowing and lending money. But if the court comes to the conclusion that the form of the transaction is only a sham and that what the parties really agreed upon was a loan which they disguised, for example, as a discounting operation, then the court will call it by its real name and act accordingly.”'' | |||
{{seealso}} | {{seealso}} | ||