Failure to Pay, DUST and Cross Default under the ISDA: Difference between revisions

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Failure to Pay, DUST and Cross Default under the ISDA (view source)

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-{{anat|isda}}For those who think it is useful to understand the interaction between {{isdaprov|Failure to Pay}}, {{isdaprov|DUST}} and {{isdaprov|Cross Default}}.
+{{anat|isda}}For those who think it is useful to understand the interaction between {{isdaprov|Failure to Pay}}, {{isdaprov|DUST}} and {{isdaprov|Cross Default}}. Generally, the risks get bucketed into three:
+#That you default ona transaction ''under this actual {{isdama}};''
+#That you default under any analogous transaction with me under a different master trading agreement;
+#That you default under a transaction with someone else in the world, the implications of that default being so heinous it should entitle me to terminate the risk I have under my transactions with you.
-*'''{{isdaprov|FTP}}''' covers payment under delivery defaults directly under the {{isdama}}
+*'''{{isdaprov|FTP}}''' covers payment under delivery defaults directly under the {{isdama}}. Obviously straightforward. You don't need any special cross-termination rights here.
-*'''{{isdaprov|DUST}}''' covers trades under other master trading agreements (and distinct {{isdama}}s — unlikely, but not impossible) ''between the same two parties''
+*'''{{isdaprov|DUST}}''' covers default under transactions governed by ''other'' master trading agreements (and distinct {{isdama}}s — unlikely, but not impossible) ''between the two of us''.
-*'''{{isdaprov|Cross Default}}''' covers {{isdaprov|Specified Indebtedness}} (unless you’re odd, that means [[borrowed money]]) between the [[counterparty]] and any [[third party]].
+*'''{{isdaprov|Cross Default}}''' covers defaults under “{{isdaprov|Specified Indebtedness}}” (unless you’re odd, that just means normal indebtedness, or [[borrowed money]]) between the [[counterparty]] and any [[third party]], provided the default is so material (by reference to a {{isdaprov|Threshold}}) that it casts doubt on the counterparty’s ongoing viability (and hence its ability to perform its obligations to me uinder the {{isdama}}).
-{{isdaprov|Failure to Pay}} and {{isdaprov|DUST}} are meant to be mutually exclusive.
+{{isdaprov|Failure to Pay}} and {{isdaprov|DUST}} are meant to be mutually exclusive by reference to ''governing agreement'' ({{isdaprov|FTP}} is stuff under this specific {{isdama}} right here, {{isdaprov|DUST}} being stuff under any ''other'' master trading agreement). {{isdaprov|DUST}} and {{isdaprov|Cross Default}} are meant to be mutually exclusive by reference to ''contract type'' ({{isdaprov|Specified Transactions}} under master trading agreements tend not to be “funded” and thus are not, by design, contracts of [[indebtedness]], especially in these times of mandatory collateralisation). This does not stop well-meaning but ignorant risk teams expanding Cross-Default to cover obligations that are not in the nature of indebtedness