Inter-affiliate ISDA negotiation
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With apologies to Charles Dickens
The idea first struck Wickliffe Hampton’s London trading desk that it should hedge its own debt value adjustments by laying them off to its German affiliate, Wickliffe Hampton Deutschland GmbH, as it then was, in 1996. A quick conversation between the desks settled that this might be a mutually beneficial arrangement — Deustchland had its own, own-credit risk to manage, after all, and couldn’t they swap them? The transaction management process was invoked, a request raised to put in place the necessary contract documentation, a 1992 ISDA, following the prompt conclusion of which the pair of affiliates could scratch each others’ revenue-stating backs cheaply, effectively and the for the hereafter.
On such an afternoon some score of members of the “Contract Negotiation Specialists Group”, as it is for the time being known, are mistily engaged in one of the ten thousand stages of an endless cause, tripping one another up on the slippery slope of precedent, groping knee-deep in escalations, running their heads against unpunctuated walls of words and making a great pretence of commercial point and counterpoint, as players in a cosmic comedy might.
On such an afternoon the various transaction managers paralegals, negotiators, legal process outsourcers, credit officers in the cause, most of whom have inherited these roles from a predecessor who also made a living out of it, ought to be — as are they not? — arranged in a line, with side-letters, margin lock-ups, credit support documents, title-transfer collateral arrangement disclosures, Cross Default thresholds, Additional Termination Events, fee schedules, conditions precedent, conditions subsequent, authorised signatory lists, audited financial statements, mountains of costly nonsense all, piled before them.
Well may the commercial objective be dim; well may the fog of war saturate the recycled tropes have grown calcific through time-tested abeyance, their original purpose now so encrusted in soporific text it can not escape, and no negotiator has the disposition, let alone a mandate, let alone the fortitude, to go in after it with the hammer and chisel it deserves. Instead, countless disempowered agents will lay yet more silt upon the accretive communiques by which they relay their halting progress back to countless disempowered superiors, bewildering may the obstacles to consensus described within them be that they may pass uncomprehended and therefore unresolved amongst those occupying the higher rungs whose designated role is adjudication; well may we uninitiated from the streets, were we yet allowed to slip those security-controlled doors, gather up a printed sheaf and peruse its labyrinthine figures, be deterred from going on by its owlish aspect and by the simple acreage of black 11 point Times New Roman on white on a scale that presents as entropic blur, an invariant shade of grey that crisply snuffs what wick the lantern of curiosity might ever have possessed.
In this way negotiation acquires its own life, its own interests, its own corporeal form. It has a personality; it has its own interests, quite distinct from those whose fussy ministrations give it life. As a negotiation endures, it grows stronger — every extra effort in its cause expands it mass and lends it gravity, such that those who people its onward trajectory fall under its influence and then into its orbit: they can no more escape it than can they slip the surly bonds of Earth and dance the skies. Nor would they care to do so, for in its silken folds lie safety, security, nourishment and warmth — as long as the negotiation is on foot, their basest needs are met.
But all things are mortal — when counterparts are so far apart that no path to consensus remains, a negotiation should, in theory, die. But one sufficiently established, in whose ongoing progress enough stakeholders have a personal interest, may have the momentum to survive even this. For — when a platinum client promises yearly returns best expressed as exponents, to hope is too faint not to keep plugging away; no point of juridical principle ever so grave as to put an end to the whole monstrous edifice.
This is the world of master agreement negotiation, which has its dreary templates and its blighted forms for every outcome; which has its mis-scanned faxed amendments and redundant, dead novations logged, misfiled and clogging every client identifier, every one with mis-keyed client static data; which has its ruined netting designation feeds, running this way and that, haywire into financial reporting systems; which has its deluded salespeople with their threadbare grasp of crucial points; which relaxes red-line protections for really important clients intent on running outsized risks — the call it “leveraged alpha” — on which one would not dream of compromising for more timid clients who trade with un-geared circumspection; which so exhausts Finance Reportings, Legal, Compliance and Credit — which so overthrows the brain and breaks the heart, that there is not one among its practitioners who would not say—who does not often say — the "Suffer any wrong that can be done you rather than come here!"
Who happen to be engaged on an all-hands conference call this murky afternoon? There is the negotiator, his boss, a chap from tax, two or three from operations who, as best the remainder know, are never otherwise occupied but to participate on calls like this, and a brace calling in from an outsourced credit risk team in Gdansk. The transition manager makes his way through a twelve-point list in dour monotone. The rest, not talking, yawn; those not yawning multi-task; those not multitasking have disabled cameras and gone on mute while they book last-minute weekend breaks in the vain hope of restoring sagging spirits, for on no account will spiritual redemption be found in the matter at hand: it was squeezed dry, dusted with lime and buried months ago. Salespeople, normally so animated, invariably decamp when this negotiation an ISDA Master Agreement between two wholly-owned subsidiaries of the same firm, comes on.
It drones on. The points of contention in this scarecrow of a deal have, over time, become so complicated that no soul alive now knows in detail what they are. The negotiation teams least of all, but it has been observed that no two stakeholders can discuss it for five minutes without becoming heated as what remains outstanding. Innumerable third parties have, through is tedious course, been dragged in. Other businesses, with no real business being there, but which have made it their business and then become catatonically transfixed by the dreadful business, yet strangely induced to remain by the promise of more business. A custodian here, a process agent there; a third-party intermediary bank to stand between journal entries between branches of the same entity, to help get the financial reporting right. They have pressed their own teams into the fray, extract necessary protections from the parties so that they may carry out their limited functions,. collected their fees, and their executives sleep dreamless sleep. Yet, that being as it may, some of these other businesses have in the mean time merged, consolidated, changed business model or just fallen outright into bankruptcy along the way. The indemnities, disclaimers, keep-wells and covenants they extracted — these, and other textual flourishes on which they in their pomp insisted, by way of doubt avoidance, inclusion or recourse limitation and which made it into the draft remain embedded, so structurally critical to the architecture of the document that no-one dares to take them out lest the whole edifice collapses under its gargantuan weight. There is not a single representative of either party who attended the birth of this monster and who is still in situ in the same role now. Dozens have resigned, a few retired, at least one has died: but the Wickliffe Hampton Agency ISDA still drags its dreary length before the market, perennially hopeless.