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Cross default: Difference between revisions
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Now a borrower that is not due to pay anything, can hardly [[Failure to pay|fail to pay]]. | Now a borrower that is not due to pay anything, can hardly [[Failure to pay|fail to pay]]. | ||
This presented the lender with a risk: if, in the mean time, his borrower failed to pay | This presented the lender with a risk: if, in the mean time, his borrower failed to pay under a loan from ''another'' lender, our lender would be in a difficult spot: it has good reason to think the borrower is in trouble, but the borrower hasn’t missed any payments — how could it? ''None were due''. Waiting for the next payment to see if the borrower will meet it, won’t do. Our borrower wants to accelerate its loan ''now'' — ideally, before the other lender accelerates its loan: Our lender wants to get in while the going is still tolerably good. | ||
Whence came the notion of a [[cross default]]: | Whence came the notion of a [[cross default]]: | ||
:''If you default under a loan you have borrowed from someone else, you default under your loan with me.'' | :''If you default under a loan you have borrowed from someone else, you default under your [[loan]] with me.'' | ||
This is a drastic measure. It means | This is a drastic measure. It means the borrower and multiple lenders are in a Mexican stand-off: Each lender is incentivised to be trigger happy, to get in before some other blighter accelerates first. Therefore some thresholds were put around it: The size of the loan being defaulted on would need to be material enough to threaten the borrower’s very solvency. | ||
Note the key "vulnerabilities" of a lender that a [[cross default]] clause is designed to protect against: | Note the key "vulnerabilities" of a lender that a [[cross default]] clause is designed to protect against: | ||
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*'''Infrequent payments''': Our lender is owed infrequent payment obligations and canot therefore rely on a [[failure to pay]]. | *'''Infrequent payments''': Our lender is owed infrequent payment obligations and canot therefore rely on a [[failure to pay]]. | ||
*''Material default''': The borrower may default on ''other'' indebtedness in a size big enough to threaten its own viability. | *''Material default''': The borrower may default on ''other'' indebtedness in a size big enough to threaten its own viability. | ||
==={{isdaprov|Cross default}} in the {{isdama}}=== | |||
In their infinite wisdom (or jest), the framers of the [[1987 ISDA Interest Rate and Currency Exchange Agreement]] ([[cro-magnon man]] to the {{2002ma}}’s metropolitan hipster) thought it might be wise to include a cross default provision, perhaps because, in those heady days, crfedit support annexes weren’t run-of-the-mill. | |||
[[Mediocre lawyer|Lawyers]] being the creatures of habit they are, especially when sequestered into an [[ISDA working group]], never thought to take it out, and even our artisanal coffee swilling {{2002ma}} boasts a tedious Cross Default provision, an embarrassing relic of its agricultural ancestry. | |||
But, for a [[master trading agreement]], it’s a nonsense. | |||
A counterparty to an {{isdama}}, particularly one with a zero-threshold daily {{isdaprov|CSA}} and many {{isdaprov|transaction}}s under it, suffers none of those weaknesses. | A counterparty to an {{isdama}}, particularly one with a zero-threshold daily {{isdaprov|CSA}} and many {{isdaprov|transaction}}s under it, suffers none of those weaknesses. | ||