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{{isdaanat|5(a)(vi)}} | {{isdaanat|5(a)(vi)}}''This article is specifically about the {{isdaprov|Cross Default}} provision in the {{isdama}}. For a general discussion of the concept, see [[cross default]]. | ||
''Want to quickly convert to | |||
''Want to quickly convert {{isdaprov|Cross Default}} to {{isdaprov|Cross Acceleration}}? Click '''[[Cross Acceleration - ISDA Provision|here]]'''.''<br> | |||
===General=== | ===General=== | ||
{{isdaprov|Cross Default}} is intended to cover off the unique risks associated with ''lending money to counterparties who have also borrowed heavily from other people''. If you try - as starry-eyed [[credit officer]]s like to - to apply it to contractual relationships which aren't debtor/creditor in nature, it will give you gyp. This will not stop credit officers doing that. | |||
Under the {{isdama}}, if the cross default applies, default by a party under a contract for “{{isdaprov|Specified Indebtedness}}” with a third party in an amount above the “{{isdaprov|Threshold Amount}}” is an {{isdaprov|Event of Default}} under the {{isdama}}. | Under the {{isdama}}, if the cross default applies, default by a party under a contract for “{{isdaprov|Specified Indebtedness}}” with a third party in an amount above the “{{isdaprov|Threshold Amount}}” is an {{isdaprov|Event of Default}} under the {{isdama}}. | ||
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===Cross Aggregation=== | ===Cross Aggregation=== | ||
The {{2002ma}} updates the {{1992ma}} cross-default so that if the outstanding | The {{2002ma}} updates the {{1992ma}} cross-default so that if the combined amount outstanding under the two limbs of {{isdaprov|Cross Default}} exceed the {{isdaprov|Threshold Amount}}, then it will be an {{isdaprov|Event of Default}}. Normally, under the {{1992ma}}, {{isdaprov|Cross Default}} requires one ''or'' the other limbs to be satisfied — you can’t add them together. | ||
As per the above, the two limbs are: | As per the above, the two limbs are: | ||
*a default | *a default under a financial agreement that would allow a creditor to [[accelerate]] any [[indebtedness]] that party owes it; | ||
*a failure to | *a [[failure to pay]] on the due date under such agreements after the expiry of a [[grace period]]. | ||
{{DUST and Cross Default Comparison}} | {{DUST and Cross Default Comparison}} | ||
===The difference between the two formulations=== | ===The difference between the two formulations=== | ||
[[File:Crossing Threshold Hope.jpg|thumb|left|About as much use as a cross default clause]] | [[File:Crossing Threshold Hope.jpg|thumb|left|About as much use as a cross default clause]] | ||
====Measure of the Threshold==== | ====Measure of the Threshold==== | ||
*''' | *'''{{1992ma}}''': This contemplates default “in an aggregate '''amount'''” exceeding the {{isdaprov|Threshold Amount}} which would justify early termination of the {{isdaprov|Specified Indebtedness}}: that is to say the value of the failed payment, and not the whole principal amount of the {{isdaprov|Specified Indebtedness}} it was owed under, contributes to the {{isdaprov|Threshold Amount}}, ; | ||
*''' | *'''{{2002ma}}''': This contemplates an [[event of default]] under agreements whose “'''aggregate principal amount'''” is greater than the Threshold Amount: that is to say it is the ''whole principal amount'' of the agreement which is picked up, not just the amount of the payment. | ||
This change, we speculate, is meant to fix a howler of a drafting lapse: | This change, we speculate, is meant to fix a howler of a drafting lapse from {{icds}}: | ||
*It can be triggered by any [[event of default]], not just a payment default ( | *It can be triggered by any [[event of default]], not just a payment default (i.e. the {{1992ma}} requirement for "an {{isdaprov|Event of Default}} ... ''in an amount equal to...''” impliedly limits the clause to ''payment'' defaults only since other defaults aren't “"in an amount"”...); | ||
*It captures the whole | *It captures the whole value of the {{isdaprov|Specified Indebtedness}}, not just the value of the default (if it even ''is'' a payment capable of being valued) itself. | ||
For example: if you defaulted on a | For example: if you defaulted on a small interest payment on your {{isdaprov|Specified Indebtedness}} which made your whole loan repayable, under the {{1992ma}} you could only count the value of that missed interest payment to your {{isdaprov|Threshold Amount}}. But the whole loan is at risk of being accelerated — so this is a much more significant credit deterioration than is implied by the missed payment. | ||
It is innocuous, that is, unless you are cavalier enough to include ''derivatives or other payments which are not debt-like'' in your | It is innocuous, that is, unless you are cavalier enough to include ''derivatives or other payments which are not debt-like'' in your {{isdaprov|Specified Indebtedness}}. But if you do that, you've bought yourself a wild old ride anyway. | ||
Don't say you weren't warned. | Don't say you weren't warned. | ||
{{sa}} | {{sa}} | ||
*[[Cross acceleration]] | *[[Cross acceleration]] | ||
{{ref}} | {{ref}} |