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Template:Cross default in securities financing agreements: Difference between revisions
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Template:Cross default in securities financing agreements (view source)
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There’s no need for [[cross default]] in ''any'' [[master trading agreement]], actually — this is the [[JC]]’s considered view, about which you can read at length elsewhere — but the {{gmsla}} and {{gmra}} are a particularly bad candidates for cross default because their transactions are by definition short term (in the case of {{gmra}}) and on call (in the case of {{gmsla}}), so the “mischief” the [[cross default]] is designed to remedy — large [[credit exposure]] under transactions with long tenor and few regular cash-flows — does not exist. | There’s no need for [[cross default]] in ''any'' [[master trading agreement]], actually — this is the [[JC]]’s considered view, about which you can read at length elsewhere — but the {{gmsla}} and {{gmra}} are a particularly bad candidates for cross default because their transactions are by definition short term (in the case of {{gmra}}) and on call (in the case of {{gmsla}}), so the “mischief” the [[cross default]] is designed to remedy — large [[credit exposure]] under transactions with long tenor and few regular cash-flows — does not exist. | ||
[[Cross default]], remember, is a banking concept, designed to protect [[Lender|lenders]] who have unsecured [[credit exposure]] to [[Borrower|borrowers]] under fixed rate [[Loan|loans]] where the only material payments will be regular [[interest]] payments, which might be as infrequent as quarterly, semi-annual or even annual. If the lender knows the borrower has defaulted on material [[indebtedness]] to another [[lender]] | [[Cross default]], remember, is a banking concept, designed to protect [[Lender|lenders]] who have unsecured [[credit exposure]] to [[Borrower|borrowers]] under fixed rate [[Loan|loans]] where the only material payments will be regular [[interest]] payments, which might be as infrequent as quarterly, semi-annual or even annual. If the [[lender]] knows the [[borrower]] has defaulted on material [[indebtedness]] to ''another'' [[lender]] — some ''random'' — it will not want to wait nine months to see if there is a [[failure to pay]] on its own [[Loan|facility]] before taking any defensive action. Hence, a [[cross default]] right. If ''she'' can pull you down, ''I'' can pull you down. | ||
===There’s no need to put one in. Even if you are doing [[term loan|term loans]].=== | ===There’s no need to put one in. Even if you are doing [[term loan|term loans]].=== | ||
All the talk of borrowers and lenders in [[securities financing transaction]]s makes a certain sort of person giddy. But remember: [[SFTR|SFTs]] are ''not'' contracts of indebtedness. {{gmslaprov|Lender}}s aren’t — legally or economically — [[lender|lenders]]. Thus, the omission of [[cross default]] from the standard [[SFT - SFTR Provision|SFT]] agreements ''was not an error''. It was deliberate. | |||
Now, there is a certain stripe of [[credit officer]] who will not be convinced of this, [[Cassanova’s advice|and will want to put one in anyway]]. Does it do any harm? Well ''yes'', actually: it creates [[contingent liquidity]] issues for your own treasury department, whom credit will routinely ignore when making their credit requests. And yes, from the perspective of production waste in the [[negotiation]] process: insisting on a cross default is, par excellence, the [[waste]] of {{wasteprov|over-processing}}. | |||
Why not put one in for good measure? [[SFT - SFTR Provision|SFTRs]] are collateralised daily, so: | Why not put one in for good measure? [[SFT - SFTR Provision|SFTRs]] are collateralised daily, so: | ||