Cross acceleration - ISDA Provision: Difference between revisions

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 Now to be sure [[legal eagles]], especially the ''lesser-spotted buy-side legal eagle'', might start hopping up and down, flapping their wings and squawking restively at this point. “But,” they will say, “what about grace periods and operational errors on that final payment. We must be allowed those before you can close us out!” You may roll your eyes at this — the [[JC]] certainly does — and while it might make you feel better for a moment, it won’t make the problem go away. The short answer is that ordinary grace periods are factored in — the event isn’t triggered until they have all expired, and as for contractual affordances that don’t quite count as grace periods (that are dependent on the borrower providing evidence of operational error) — well, on a fair, large and liberal view these count as grace periods anyway, and if you aren’t persuaded of that [[I’m not going to die in a ditch about it|am I going to die in a ditch about it]]? It depends how late it is on a Friday, and how sporting I am feeling, is the usual answer.
-===Is loosening up to [[cross acceleration]] ''wise'', though?===
+===Is “downgrading” to [[cross acceleration]] ''wise'', though?===
 There are two schools of thought:
-*The sensible, pragmatic, wise, free one you will find in these pages: “''Yes''. Cross default is totally misplaces in an {{isda}} so anything you can do either to restrict its scope, or simply to avoid being dragged into a tedious argument about it, is sensible.”
+*''''Yes''': The sensible, pragmatic, wise, [[noble, fearless and brave]] one you will find in these pages: “''Yes''. Cross default is misplaced in a modern collateralised {{isda}}. Anything you can do either to restrict its scope, or simply to avoid being dragged into a [[tedious]] argument about its scope, is sensible.”
-*The learned one, from the learned author of that terrible [[FT book about derivatives]], which is: “All other things being equal, ''no''. One should only weaken [[cross default]] reluctantly.”
+*'''No''': The learned one, from the learned author of that terrible [[FT book about derivatives]]: “All other things being equal, ''no''. One should only weaken [[cross default]] reluctantly.”
-With respect to my learned friend, his reasoning isn’t massively compelling:
+With respect to my learned friend, his reasoning isn’t massively compelling, as it rather mischaracterises what is going on:
-:
+:''With [[cross acceleration]] the innocent third party actually has to start proceedings<ref>Actually, it doesn’t have to ''sue'' your counterparty; just call its debt in.</ref> against the defaulting counterparty before you can trigger your transaction termination rights ... . The downgrading [of cross default to cross acceleration] therefore affects the timing of your right to terminate, It is no longer automatic but deferred.<ref>I have no idea what the learned author means by “automatic” here: either way the your termination right is ''optional'', not ''automatic'': it is simply contingent on an independent event in either case: in one case the default; in other case the lender’s ''acceleration'' of the default.</ref>
+:''If the third party is your counterparty’s main relationship bank it may take some time to review its position<ref>Indeed it may, and probably will. ''But while it is doing that it is not accelerating its indebtedness.'' It is granting its customer an indulgence. Your position is, therefore, not worsened in the mean time.</ref> and may propose a compromise which does not suit you. <ref>You, bear in mind, are the owner of a fully collateralised {{isdama}} which the counterparty has, in the mean time, continued faithfully to perform. If one of your co-creditors has granted an indulgence on outstanding indebtedness — even in return for some other surety or compromise — which avoid that debt being accelerated in full, how can that by itself make your position worse?</ref>
+The learned author is correct, that you are marginally worse off if you have conceded to cross acceleration and other swap counterparties have not. But in the age of zero-threshold, daily margined variation margin, and given the extreme conceptual difficulty of gathering enough information to be confident you even can exercise your cross default (just how a third party would ever be able to assess the value of defaulted Specified Indebtedness has never been explained) this is angel-on-the-head-of-a-pin stuff indeed.
 {{sa}}
 *[[Cross default]] generally
+{{ref}}