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Finance contract: Difference between revisions
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{{A|negotiation| | {{A|negotiation|{{financecontractenvy}} | ||
{{image|Bank contract envy|png|Some finance contract envy, yesterday.}} | |||
}}{{d|Finance contract|/faɪˈnæns | }}{{d|Finance contract|/faɪˈnæns ˈkɒntrækt/|n|}} | ||
Any [[contract]] the gist of which is for its parties to exchange ''large'' — like, ''really'' large — amounts of [[money]], or [[Securities|money-like things]], having readily realisable value, and the performance of which therefore generates significant [[credit risk]], should one of the parties [[Insolvency|blow up]] before it can pay everything it owes under the contract. | Any [[contract]] the gist of which is for its parties to exchange ''large'' — like, ''really'' large — amounts of [[money]], or [[Securities|money-like things]], having readily realisable value, and the performance of which therefore generates significant [[credit risk]], should one of the parties [[Insolvency|blow up]] before it can pay everything it owes under the contract. | ||
===Loans=== | |||
The classic finance contract is a [[loan]]. I lend you a large sum of money; you pay me interest, and eventually pay it back. In the mean time I am constantly beset by daemons, plagues, dread terrors and so on, fantastical threnodies all on the single worry that ''you never pay me back''. | |||
The | The loan has one unique feature that makes it even more fraught than the other trading contracts. It involves a big guy giving a little guy a lot of money, and hoping upon hope, for the term of the loan, that the little guy manages to stick around and pay it back. | ||
Other good examples are [[swap]]s, futures, [[securities]], [[Securities financing transaction|securities financing arrangements]], [[option]]s, trade financing arrangements, securitisations and commodity supply contracts, and assurances offered to support others’ obligations under loans, like [[guarantee]]s. Extra points for excitement if they [[cross-border|cross borders]] or constitute, as they often will, regulated activity of some kind. | ===Types of loan=== | ||
'''Conventional loans''': “Ordinary” loans can be [[term loan]]s, at-call loans (often called [[deposit]]s — for these, you must be licenced to accept deposits), revolving credit facilities, and big ones can be syndicated amongst a bunch of borrowers. There are also traded interests in [[loan]]s called [[participation]]s. These may also be secured or unsecured. | |||
'''Debt securities''': These are loans in the form of tradable securities: [[Debt security|Bond]]s, notes, or [[Certificate of deposit|certificates of deposit]]. That kind of thing. | |||
'''[[Margin loans]]''': Margin loans are a separate type of secured loan, where the amount loaned depends on the value of an asset you must buy with the loan and give to the lender as collateral for safekeeping. Prime brokerage is a kind of margin loan, as is stock loan. These resemble traded contracts, and sometimes people forget they are loans, but they are. | |||
===Trading contracts=== | |||
Trading contracts do not, ostensibly, involve one person forking out a whole lot of cash and giving it away and hoping for the best, but often this is their economic effect. Other good examples are [[swap]]s, futures, [[securities]], [[Securities financing transaction|securities financing arrangements]], [[option]]s, trade financing arrangements, securitisations and commodity supply contracts, and assurances offered to support others’ obligations under loans, like [[guarantee]]s. Extra points for excitement if they [[cross-border|cross borders]] or constitute, as they often will, regulated activity of some kind. | |||
Finance contracts create special, ''large'', monetary risks. These are different in quality and nature than risks presented by other contracts. You may — in fact, almost certainly will — feel a deep resentment and disappointment at those you engage to carry out your loft extension, as the fourteenth month passes of a project you were assured would take six weeks, but the answer is just to not pay for things they haven’t done, or have done half-heartedly, or have bished up. These things may well exasperate you, mightily, but they aren’t ''that'' likely to send you to the brink of ruin, and — trust me — ''however'' dismal your contractors may be, suing them will be worse, and “self-help” isn’t really an option. If it was, no-one would hire builders in the first place. Wouldn’t that be a beautiful world. | Finance contracts create special, ''large'', monetary risks. These are different in quality and nature than risks presented by other contracts. You may — in fact, almost certainly will — feel a deep resentment and disappointment at those you engage to carry out your loft extension, as the fourteenth month passes of a project you were assured would take six weeks, but the answer is just to not pay for things they haven’t done, or have done half-heartedly, or have bished up. These things may well exasperate you, mightily, but they aren’t ''that'' likely to send you to the brink of ruin, and — trust me — ''however'' dismal your contractors may be, suing them will be worse, and “self-help” isn’t really an option. If it was, no-one would hire builders in the first place. Wouldn’t that be a beautiful world. | ||
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| No set-off or counterclaim || A provision stating that “all sums shall be paid in full, free of any restriction, condition, set-off or counter-claim, and without deduction or withholding for or on account of tax except where required by law”|| Because in the ordinary world or service contract this goes without saying, and the hassle is manageable even where it doesn’t: this is relevant when you are paying [[cashflows]], [[Manufactured dividend|manufacturing dividends]] and so on across borders, or where a certain sum arriving at a certain time in a certain place without counterparty nibblement is important. If your client deducts tax from your consulting fees, or has set them off against something you owe it, that’s a bummer for sure, but you’ll ''survive'': it won’t set an ending chain of operational payments into a vortex of destruction. As our friends in the [[stupid banker]] cases show us, you don’t have to get things that badly wrong for things to go really, apocalyptically ''badly'' wrong. | | No set-off or counterclaim || A provision stating that “all sums shall be paid in full, free of any restriction, condition, set-off or counter-claim, and without deduction or withholding for or on account of tax except where required by law”|| Because in the ordinary world or service contract this goes without saying, and the hassle is manageable even where it doesn’t: this is relevant when you are paying [[cashflows]], [[Manufactured dividend|manufacturing dividends]] and so on across borders, or where a certain sum arriving at a certain time in a certain place without counterparty nibblement is important. If your client deducts tax from your consulting fees, or has set them off against something you owe it, that’s a bummer for sure, but you’ll ''survive'': it won’t set an ending chain of operational payments into a vortex of destruction. As our friends in the [[stupid banker]] cases show us, you don’t have to get things that badly wrong for things to go really, apocalyptically ''badly'' wrong. | ||
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| [[No waiver]] || Tedious verbiage to the effect that “No failure or delay in exercising, any remedy under this Agreement will operate as a waiver, nor will any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy.”|| Again, this is all about ''does this dude owe me the ten million dollars or not'' rather than “will I get paid my $ | | [[No waiver]] || Tedious verbiage to the effect that “No failure or delay in exercising, any remedy under this Agreement will operate as a waiver, nor will any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy.”|| Again, this is all about ''does this dude owe me the ten million dollars or not'' rather than “will I get paid my $2,000 consulting fee”. If, [[Commercial imperative|out of the goodness of your heart]] and a realistic view of your long term revenue prospects, you let a distressed creditor off strict enforcement during a tough patch, to help it through a difficult cashflow situation, you don’t want to find you have waved away your rights to get that money later, or ''not'' grant that indulgence should it find itself “inexplicably” in the same situation again next time a margin payment is due. | ||
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| [[Assignment|No Assignment]] || Words to the effect that one party can’t assign or transfer its rights without the other’s consent. || {{no assignment capsule}} | | [[Assignment|No Assignment]] || Words to the effect that one party can’t assign or transfer its rights without the other’s consent. || {{no assignment capsule}} | ||