Definitions

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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(Pub.L. 93–406, 88 Stat. 829, enacted September 2, 1974, codified in part at 29 U.S.C. ch. 18) as amended, restated or superseded from time to time.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 hand, 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 global markets and you don’t know what “ERISA” mean, you really need to get your coat.

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 definitons in ISDA Master Agreement, the Schedule and the Confirmation to work out what a capitalised expression might mean.

The JC’s rules of thumb

How many: As few as possible.
Where: Generally, put definitions at the end. Embed them in the body of the agreement only where they are used 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.
What: Use definitions:

  • To save repetition: An expression which is (a) wordy and (b) appears a LOT in the agreement. If it 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 query do you need to define this at all? after all, what else could you realistically mean by “custody assets”?
  • To create a new technical expression that doesn’t otherwise have any meaning: 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.
  • To gather together disparate concepts into a single expression and it would not otherwise be obvious.

When not to use definitions: When the defined term is obvious. Everyone knows that the EU means the European Union. Everyone knows MiFID 2 means. Everyone (right?) knows what ERISA means.

See also