No event of default or potential event of default

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Representations and Warranties Anatomy

A “typical” No default or potential event of default clause:

No event of default or potential event of default: there has been no event of default or potential event of default under this agreement, and none would occur as a result of you executing or performing your obligations under this agreement.

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Representations and warranties generally | Representations | Warranties | Covenants | Acknowledgements | Representations in the ISDA | Warranties in the GMSLA | Representations in the GMRA | Waiver by estoppel | Acknowledgement Common representations: Status | Capacity | Authority | No violation | Consents | Obligations binding | Principal | Understanding | Non-reliance | No representation | Unencumbered owner | No default or potential event of default | No litigation | No fiduciary obligation |

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Can you understand the emotional rationale for this representation? Sure. Does it do any practical good? No.

A No EOD rep is a loo paper rep: soft, durable, comfy, absorbent — super cute when a wee Labrador pub grabs one end of the streamer and charges round your Italian sunken garden with it — but as a credit mitigant or a genuine contractual protection, only good for wiping your backside on.

Bear in mind you are asking someone — on pain of them being found in fundamental breach of contract — to attest that they are not already in fundamental breach of contract. Now, how much comfort can you genuinely draw from such promise? Wouldn’t it be better if your credit team did some cursory due diligence to establish, independently of the say-so of the prisoner in question, whether there are grounds to suppose it might be in fundamental breach of contract?

Presuming there are not — folks tend not to publicise their own defaults on private contracts, after all — the real question here is, “do I trust my counterparty?” And to that question, any answer provided by the person whose trustworthiness is in question, carries exactly no informational value. All cretins are liars.[1]

So, let’s say it turns out your counterparty is lying; there is a pending private event of default it knew about and you didn’t. Now what are you going to do? Righteously detonate your contract on account of something of which by definition you are ignorant?

Have fun, counselor.

“...or potential event of default

Adding potential events of default is onerous — or would be if it weren’t simply preposterous, per the above — especially if it is a continuous representation, as it deprives the representor of grace periods it has carefully negotiated into its other payment obligations. Besides the sorts of obligations that have grace periods — usually payment and delivery obligations, are ones which you don’t need the other guy to own up to you about, because you can see for yourself that you haven’t been paid. Remember the point of representations is to attest to things you could not reasonably find out by yourself.

“... or would occur as a result of entering into this agreement”

A curious confection, you might think: what sort of event of default could a fellow trigger merely by entering into contract with me? But yet there it is, slap dab in the middle of the ISDA Master Agreement. Section 3(b). What could they have been thinking?

Well, remember the ISDA’s lineage. It was crafted, before the alliance of men and elves, by the Children of the Forest. They were a species of pre-derivative, banking people. Is it possible they had in mind the sort of restrictive covenants a banker might demand of a borrower with a look of softness about its credit standing? Perhaps a promise not to create material indebtedness to another lender, though in these enlightened times that would be a great constriction indeed on a fledgling enterprise chasing the world of opportunity that lies beyond its door. This seems to be reaching, though, readers: it talks of defaults under this agreement not another one — widening the representation to include breaches of all agreements you have entered would drastically amplify the already ludicrous risk posed by the Cross Default clause.

Speaking of which, does a swap mark-to-market exposure count as indebtedness? Many will recognise this tedious question as one addressed at great length when contemplating a Cross Default: Suffice, here, to say that an ISDA isn’t “borrowed money[2] as such, but a material swap exposure would have the same credit characteristics as indebtedness. But in these days of compulsory variation margin you wouldn’t expect one’s mark-to-market exposure to be material, unless something truly cataclysmic was going on intra-day in the markets.

Much more likely is a negative pledge, and while an unsecured, title-transfer, close-out netted ISDA might not offend one of those, a Pledge GMSLA might, and a prime brokerage agreement may well do.

But still, nonetheless, see above: if it does, and your counterparty has fibbed about it, all you can do is get out your tiny violin.

See also


  1. I know, I know.
  2. Unless your credit team decided to define it as such, of course. It does happen.