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Cross default: Difference between revisions
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This is a page about the general concept of [[cross default]]. | This is a page about the general concept of [[cross default]]. | ||
==Before we start== | |||
For specific provisions | ===As a standard term in master trading documents=== | ||
For specific provisions see: | |||
*{{isdaprov|Cross Default}} ({{tag|ISDA}}) | *{{isdaprov|Cross Default}} ({{tag|ISDA}}) | ||
*{{gtmaprov|Cross Default}} ([[GTMA]]) | *{{gtmaprov|Cross Default}} ([[GTMA]]) | ||
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*'''Stock lending and repo have no cross default''': Neither the {{gmsla}} nor the {{gmra}} have, as standard, either a [[cross default]] or a [[default under specified transaction]] provision. | *'''Stock lending and repo have no cross default''': Neither the {{gmsla}} nor the {{gmra}} have, as standard, either a [[cross default]] or a [[default under specified transaction]] provision. | ||
===Compare and | ===Compare and contrast=== | ||
*[[ | *'''[[Default under specified transaction]]''': Like cross default, but just between you and me; | ||
*[[Cross acceleration]]: like cross default, only for a kinder, gentler world | *'''[[Cross acceleration]]''': like cross default, only for a kinder, gentler world. | ||
==History== | |||
The concept of cross default developed in the loan market. If a lender advanced a large sum to a borrower with only periodic interest or principal repayments, there would be long periods between interest payments — potentially months, quarters or even ''years'' where the Borrower had no repayment obligations to the lender at all. Now it stands to reason that borrower with no payment obligations, can hardly fail to pay ({{isdaprov|Failure to Pay}} being the cleanest of all [[events of default]]). | |||
However, if in the mean time the Borrower failed to make a payment under a materially sized loan from another Lender B, Lender A is in a difficult position, unless it can accelerate its loan in response. {{isdaprov|Cross Default}} was introduced to give Lender A an out in that circumstance. To make sure it was a material default, a threshold of indebtednexss triggering that cross default right was usually included. | However, if in the mean time the Borrower failed to make a payment under a materially sized loan from another Lender B, Lender A is in a difficult position, unless it can accelerate its loan in response. {{isdaprov|Cross Default}} was introduced to give Lender A an out in that circumstance. To make sure it was a material default, a threshold of indebtednexss triggering that cross default right was usually included. | ||
Note two key " | Note two key "vulnerabilities" of a lender that a cross default clause is designed to protect against: (a) the fact the borrower has incurred material indebtedness, and (ii) the Lender A has infrequent payment obligations by which to measure the Borrower's capacity to repay. | ||
An ISDA, particularly one with a zero threshold daily {{isdaprov|CSA}} and multiple {{isdaprov|transaction}}s under it, has neither of those weaknesses. It is not a contract of indebtedness – the nearest thing to indebtedness is MTM exposure, and that is zeroed daily by means of a collateral call – and there are payment obligations arising almost every day (such as margin calls). | An ISDA, particularly one with a zero threshold daily {{isdaprov|CSA}} and multiple {{isdaprov|transaction}}s under it, has neither of those weaknesses. It is not a contract of indebtedness – the nearest thing to indebtedness is MTM exposure, and that is zeroed daily by means of a collateral call – and there are payment obligations arising almost every day (such as margin calls). | ||