Cross default: Difference between revisions

Jump to navigation Jump to search

Cross default (view source)

Revision as of 23:11, 31 March 2023

2,619 bytes removed ,  31 March 2023
no edit summary
No edit summary
No edit summary
(8 intermediate revisions by the same user not shown)
Line 1: Line 1:
[[File:Crossing Threshold Hope.jpg|400px|thumb|right|an equally forlorn attempt to influence matters beyond one's control]]
{{a|banking|[[File:Crossing Threshold Hope.jpg|450px|thumb|center|an equally forlorn attempt to influence matters beyond one's control]]}}This is a page about the general, generally stupid, concept of {{t|cross default}}.  
This is a page about the general, generally stupid, concept of {{t|cross default}}.  
==Before we start==
===As a standard term in [[master trading agreement|master trading agreements]]===
===As a standard term in [[master trading agreement|master trading agreements]]===
For specific provisions see:
For specific provisions see:
*{{isdaprov|Cross Default}} ({{tag|ISDA}})
*{{isdaprov|Cross Default}} ({{tag|ISDA}})
*{{gtmaprov|Cross Default}} ([[GTMA]])
*{{efetprov|Cross Default}} ([[EFET]])
*{{fbfprof|Cross Default}} ([[FBF]])
*{{fbfprof|Cross Default}} ([[FBF]])
*'''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. ''Unless some bright spark thinks it is a good idea to negotiate one in.''
*'''[[Cross Default - GMSLA 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. ''[[Cross Default - GMSLA Provision|Unless some bright spark thinks it is a good idea to negotiate one in]].''


===Compare and contrast===
===Compare and contrast===
Line 58: Line 54:
* [[default under specified transaction]] which references default under financial contracts which do '''not''' represent indebtedness, but only as between the two counterparties to the present contract.
* [[default under specified transaction]] which references default under financial contracts which do '''not''' represent indebtedness, but only as between the two counterparties to the present contract.


Cross default is potentially a very damaging clause, as this picture to the right amply illustrates. Or would do, if there were a picture to the right. To the extent it doesn't:  
Cross default is potentially a very damaging clause, as this picture to the right amply illustrates. Or would do, if there were a picture to the right. To the extent it doesn’t:  


===Cross default===
===Cross default===
Line 73: Line 69:
*Note that [[repo]] is not considered {{isdaprov|Specified Indebtedness}}: see [[borrowed money]]. But don’t let your inner anal retentive amending the definition in your {{isdaprov|Schedule}} so that it is (even though [[repo]] is more properly dealt with by {{isdaprov|DUST}}).
*Note that [[repo]] is not considered {{isdaprov|Specified Indebtedness}}: see [[borrowed money]]. But don’t let your inner anal retentive amending the definition in your {{isdaprov|Schedule}} so that it is (even though [[repo]] is more properly dealt with by {{isdaprov|DUST}}).


===[[Derivatives]] as {{isdaprov|Specified Indebtedness}}===
{{derivatives as specified indebtedness|isdaprov}}
Be wary of including derivatives in the definition of {{isdaprov|Specified Indebtedness}}, no matter how hight the {{isdaprov|Threshold Amount}} (we would say ''never'' do it, but realistically this sort of thing is controlled by “wise senior heads” in the [[credit department]] whose minds will be well beyond the calming influence of most jobbing negotiators, so you may well be stuck with it).
 
The {{isdaprov|Cross Default}} language aggregates up all individual defaults, so even though a single ISDA would be unlikely to have a ''net'' out-of-the-money [[MTM]] of anything like 3% of shareholders’ funds, a large number of individual transactions if aggregated may, particularly if you’re selective about which transactions you’re counting — which the cross default language entitles you to be.
 
Thus, where you have a large number of small failures, you can still have a big problem. This is why we don’t include deposits: operational failure or regulatory action in one jurisdiction can create an immediate problem.
 
The same could well be true for derivatives. Individual net [[MTM]]s under derivative [[ISDA Master Agreement|Master Agreement]]s can be very large. We have a lot of Master Agreements (18000+).
 
Say we have an operational failure (triggering a regulatory announcement, therefore public) or a government action in a given jurisdiction preventing us from making payments on all derivatives in that jurisdiction. We could have technical events of default on a large number of agreements at once – unlikely to be triggered, but for a cross default, that doesn’t matter.
 
The net MTM across  all those agreements may well not be significant. But an opportunistic counterparty could tot up all the negative mark to markets, ignore the positive ones, and reach a large number very quickly.
 
Cross Default is a banking concept intended to reference borrowed money - indebtedness etc - and it really doesn’t make economic sense to apply it to derivatives – the fact that there’s a cross default in derivatives documentation at all is something of a historical accident. There are good points made below about the difficulty of calculating it and knowing what to apply it to ([[MTM]]? {{isdaprov|Termination Amount}}? Payments due on any day?) – bear in mind these values are not nearly as deterministic as amounts due wrt borrowed money: on a failure of a derivative contract the valuation of the termination amount (off which {{isdaprov|Cross Default}} would calculate) is extremely contentious. The market is still in dispute with Lehman, for example.


===Credit Mitigation===
===Credit Mitigation===
Retrieved from "https://jollycontrarian.com/index.php?title=Special:MobileDiff/24789...72750"

Navigation menu