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Cross default: Difference between revisions
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Yet still we persist in our sophistry. | Yet still we persist in our sophistry. | ||
===Then the [[lawyer|lawyers]] and [[credit officer|credit officers]] start fiddling with things=== | |||
Cross default is a bad enough idea in a [[derivatives]] [[master agreement]] in the first place | |||
==Introduction== | ==Introduction== | ||
A cross default provision in an agreement allows a [[non-defaulting party]], on a [[default]] by the other party under any separate contract it may have entered for [[borrowed money]], to [[close out]] the agreement containing the cross default provision. Compare this with: | A cross default provision in an agreement allows a [[non-defaulting party]], on a [[default]] by the other party under any separate contract it may have entered for [[borrowed money]], to [[close out]] the agreement containing the cross default provision. Compare this with: | ||
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===Contagion risk=== | ===Contagion risk=== | ||
It is important to maintain minimum standards which are reflective of genuine credit concerns against the bank so as to limit a “snowball” effect: were we to allow a £50mm Threshold Amount, we would potentially be open to a large number of derivative counterparties simultaneously (and opportunistically) closing out out-of-the-money derivatives positions, which in itself could have massive liquidity and capital implications. | It is important to maintain minimum standards which are reflective of genuine credit concerns against the bank so as to limit a “snowball” effect: were we to allow a £50mm Threshold Amount, we would potentially be open to a large number of derivative counterparties simultaneously (and opportunistically) closing out out-of-the-money derivatives positions, which in itself could have massive liquidity and capital implications. | ||
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