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*'''It is is avoided''': A {{risk|risk}} that passes untriggered, has no value. It is like an [[option]] you wrote that expired [[out of the money]]. | *'''It is is avoided''': A {{risk|risk}} that passes untriggered, has no value. It is like an [[option]] you wrote that expired [[out of the money]]. | ||
*'''If it happens''': If the risk comes about but the {{risk|firm}} has successfully protected itself against it, again it has no value. The firm’s resulting profit and loss is flat. If the the firm has ''not'' defended against it, then notionally, someone is responsible. But see diffusion tactics – here the primacy of the {{risk|individual}}’s survival instinct over the {{risk|firm}} kicks in. | *'''If it happens''': If the risk comes about but the {{risk|firm}} has successfully protected itself against it, again it has no value. The firm’s resulting profit and loss is flat. If the the firm has ''not'' defended against it, then notionally, someone is responsible. But see diffusion tactics – here the primacy of the {{risk|individual}}’s survival instinct over the {{risk|firm}} kicks in. | ||
===[[Contractual risk]] and commercial [[decision-making]]=== | |||
Contract negotiation lawyers tend to be more consequence-agnostic than they need to be — both in creating and commenting on drafts. There is a [[decision-making]] aspect to this. Some risks are existential, some are mere irritations. Treat them differently when you formulate your positions. Consider three types of contractual provision: | |||
*'''Credit related''': Contract clauses which deal with what happens if your counterparty ''does'' — or looks like it ''imminently will'' — blow up? This is of mortal significance in a [[finance contract]], where the essence of the arrangement is for the parties to take material present financial exposure to each other, and here if there is no counterparty, you lose all your money. If your [[counterparty]] has no assets, ''it doesn’t matter what the contract says''.<ref>If you have security or netting rights, [[QED]] your counterparty still has some assets left: for example, its claims against ''you''.</ref> Can these consequences be ameliorated by the [[commercial imperative]]? Generally, no. They are, generally: | |||
:*'''[[Events of default]]/[[termination rights]]''': These allow you to get out of further obligations and mitigate the incurring of forward losses, but don’t have a lot to say about existing exposures | |||
:*'''[[Credit mitigation]] terms''': Whatever the contract says about [[enforceability of security]] and effectiveness of [[close-out netting]], things which preserve or prefer your claims over whatever assets your counterparty still has, including its [[contractual claim]]s against you. But security provisions and close-out netting formulations tend to be “[[vebra magicae]]”: incontrovertible formalities which no legal eagle dares touch. | |||
*'''Regulatory''': Will this contract put one or other party in breach of law or regulation? Whose fault is it if it does? Who bears liability? What are the consequences? Can these consequences be ameliorated by the [[commercial imperative]]? Generally, no. | |||
*'''Commercial liability''': Liability ''outside the outright failure of your counterparty''. | |||
{{sa}} | {{sa}} | ||
*[[Rumsfeld’s taxonomy]] of [[unknowns]] | *[[Rumsfeld’s taxonomy]] of [[unknowns]] | ||
{{ref}} | {{ref}} | ||