Limited recourse: Difference between revisions

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 Secondly, a pool of assets [[for the time being]] allocated to an investment manager is ''kind of nebulous''. What the client giveth, the client can taketh away. If the client’s [[asset manager]] has gone rogue, that is ''exactly'' the time at which it will be anxiously raking its assets back. So the [[swap dealer]] facing that pool of assets — who has been faithfully handling and executing all orders competently and in good faith, of course — may find that nice big juicy bucket of assets to which it has limited its recourse, ''suddenly has a hole in it''.
-Now you might extract a covenant from your asset manager — even better, from your principal — not to precipitously whip the rug away just as things are getting jiggy — but don’t bet on it. They are likely to appeal to the [[commercial imperative]] — fair enough, the [[JC]] has a healthy respect for that — but bear in mind it is rather predicated on the [[iterated prisoner’s dilemma]] — that there will be another time, there will be more business to do; that the revenue opportunities from cooperating into the infinite & unknowable future far outweigh the value of assassinating the bird sitting in the bush this very instant. But that calculus changes, mightily, in the period between the moment your porsche spyder begins to slide sideways and the point where at its current vector, it will hit the oncoming truck.
+Now you might extract a [[covenant]] from your [[asset manager]] — even better, from its [[principal]] — not to precipitously whip the rug away just as things are getting jiggy — but don’t bet on it. They are likely to appeal to the [[commercial imperative]] — fair enough, the [[JC]] has a healthy respect for that — but bear in mind it is rather predicated on the [[iterated prisoner’s dilemma]] — that there will be another time, there will be more business to do; that the revenue opportunities from cooperating into the infinite & unknowable future far outweigh the value of assassinating the bird sitting in the bush this very instant. But that calculus changes, mightily, for the period between when your [[Rotary Mazda]] begins to slide sideways and when, at its current vector, it will hit that oncoming truck.
 ====This is liability cap, not a credit mitigant====
-Thirdly, and most critically: This is a limitation on the value of your claim against a counterparty who does have available assets. You are leaving money on the table. This is a ''trading'' decision, not a ''credit'' decision. It is as if you have sold your counterparty a put option, limiting its exposure under your contract. Ask yourself why your [[credit]] team, rather than [[trading]], are being asked to approve this. Ask yourself, too, how trading might feel, if the counterparty should fail whilst [[out of the money]] when you are perfectly delta-hedged, and the
+Thirdly, and most critically: a limitation to “a specified pool of assets under management” is, make no mistake, a limitation on the ''numeric value'' of your claim. You risk leaving money on the table. That is not what limited recourse is meant to do. This ought to be ''trading'' decision, not a ''credit'' decision. It is as if you have sold your counterparty a [[put option]], limiting its exposure under your contract. Ask yourself why your [[credit]] team, rather than [[trading]], are being asked to approve this. Ask yourself, too, whether the principal isn’t going to be inclined to keep a tight rein on the value of that pool, and tend to keep it shorter rather than longer.
 ===[[Limited recourse]] formulations===
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 **'''Corporate structure''': by means of a specialist corporate structure providing for segregation of the [[corporate personality]] into little cells which may<ref>such a company and [[incorporated cell company]].</ref> or may not<ref>Such a company a [[segregated portfolio company]].</ref> have their own [[legal personality]]  (if the [[SPV]] is a [[segregated portfolio company]] or an [[incorporated cell company]]);
 *'''No set-off or netting between cells''': [[Netting]] and [[set-off]] will be limited to the specific [[cell]] you are facing: this means if your deal goes down, others issued from the same [[SPV]] can continue unaffected — boo — ''and vice versa'' — hooray.
-*'''Extinction (or non-existence) of  outstanding debt''': Following total exhaustion of all assets after enforcement, appropriation, liquidation and distribution, and realisation of all claims subsequently arising form those assets, your outstanding unpaid debt will be “extinguished”.
+*'''Extinction (or non-existence) of outstanding debt''': Following total exhaustion of all assets after enforcement, appropriation, liquidation and distribution, and realisation of all claims subsequently arising form those assets, your outstanding unpaid debt will be “extinguished”.
 **Here the intention is that you will  never have legal grounds for seeking judgment, and thereafter commencing bankruptcy proceedings, for that unpaid amount once your own cell is fully unwound and its proceeds distributed.
 **'''Pendantry alert''': some sniff at this “extinction” language, fearing it implies that there was ''once upon a time'', until extinction, a debt for an amount which the company was theoretically unable to pay — meaning that the company was, for that anxious moment in time, [[technically insolvent]]. These people — some hail from [[Linklaters]] — prefer to say “no debt is due” than “the debt shall be extinguished”.