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A boon and a bane. On one hand they can cut through needless word-proliferation:

ERISA” means The Employee Retirement Income Security Act of 1974 (Pub.L. 93–406, 88 Stat. 829, enacted September 2, 1974, codified in part at 29 U.S.C. ch. 18) as amended, restated or superseded from time to time.”

On the other, they can complicate a document by obliging the reader to flip back and forth to find what the definitions mean, especially where the definitions are embedded in the body of the agreement and not in a definitions section. And let’s face it: if you work in international finance and you don’t already know what “ERISA” means, you really need to get your coat.

Now dear old ISDA loves definitions, and you will be obliged to consult one or several definitions booklets, often with conflicting definitions, as well as the definitions in ISDA Master Agreement, the Schedule and the Confirmation to work out what a capitalised expression might mean.

How to use definitions

Have as few as possible. Generally, put them at the end. This is a core design principle. They should be bits of additional detail should a reader need them. like footnotes, so don’t clutter up the reading experience by putting them inline. For God’s sake, don’t put them at the start of an agreement. Would you start reading a book with the footnotes? Embed definitions in the body of the agreement only where they appear only in a single clause. Then, it is easier to see the definition where it first appears in context than have to flip to the back of the document.

When to use definitions

In two cases:

Firstly, to save repetition of a wordy phrase that appears a LOT in the agreement: to gather together disparate concepts into a single expression which would not otherwise be obvious. But if the phrase, however prolix, only appears twice or three times, why define it? “Securities, financial instruments or other financial assets standing to the credit of the custody account” is harder to get through than “Custody Assets”. Though do you really need to define this at all? What else, realistically, could you mean by “custody assets”?

Secondly, to create a new technical expression that doesn’t otherwise mean anything: Let’s say US accounting rules require an investor has the right to exchange its asset-backed security for the beneficial interest in the assets underlying the note. (Well, you never know, right?) You might call this the “BIE Option”. Sure, it’s confusing, but no more confusing than the actual obligation in the first place.

When not to use definitions

When the defined term is obvious. Everyone knows what the “EU” means. Everyone knows what “MiFID 2” means. Everyone (right?) knows what “ERISA” means.

This is especially when the proposition sought to be achieved is not in the slightest bit controversial in the first place. Take the dear old financial collateral regulations, which impose sensible standardisations and strike out pointless formalities when registering security interests on financial assets. Everyone knows what they are, everyone likes them, everyone agrees they save time, effort and box-ticking angst. So do you need to define exactly what they are? No. So, does this markup at any value to anyone in the world, in any way whatsoever?

this security interest constitutes a financial collateral arrangement as defined in the Financial Collateral Regulations (No. 2) Regulations 2003 (SI 2003/3226)(as amended from time to time (the “Financial Collateral Regulations”)

I humbly submit it does not. Especially since, notwithstanding all that towering anality, the miserable blighter didn’t even get it right. It is the “The Financial Collateral Arrangements (No.2) Regulations 2003”.


See also