Template:20 days notice ISDA: Difference between revisions

Remember the {{isdama}} was invented by banking folk: people who who view the cosmos chiefly through the prism of [[indebtedness]]<ref>Hence, a {{isdaprov|Cross Default}} clause in the [[ISDA]]. Well — can you think of another reason for it?</ref>. A [[lender]] whose [[borrower]] has defaulted will not dilly dally: she will bang in a default notice and seize whatever assets she can get her hand in poste haste. I lend, you owe. I don’t muck about. Breakage costs on a loan are easy to calculate and they are not especially volatile. The longer i take to terminate my exposure and set about recovering, the larger my exposure is likely to be.

But, but, but. [[ISDA|ISDAs]] are different. They are not, ''principally''<ref>{{hawf}}</ref>, a contract of [[indebtedness]], and while a large uncollateralised [[mark-to-market]] [[exposure]]<ref>Such as the sort you could have if it were 1987 and the [[credit support annex]] ''hadn't been invented''.</ref> is economically the ''same'' as indebtedness, the contract is bilateral, and who is indebted at any time is dependent on the net exposure: it can swing around.

Also, the [[mark-to-market]] exposure on swap {{isdaprov|transaction}} is a wildly volatile thing: With a [[loan]], less so: you know you have (a) principal, (b) accrued interest and (c) break costs — the last of which might be significant for a long term fixed rate loan<ref>But are there such things in this day and age? Serious question.</ref>, but generally will pale in comparison to the principal sum owed.

So a swap counterparty who terminates might be [[out of the money]], and disinclined to terminate just now, hoping that a more benign market environment might be just around the corner to dig it out of its hole so that when it does terminate, the {{isdaprov|Close-Out Amount}} will be favourable. This is still taking quite the market punt on a bust counterparty — by means of a [[European Option - Equity Derivatives Provision|European option]] — of course, and not the sort of thing a prudent risk manager would do<ref>The silly FT book is right about this, to be fair.</ref>, but I don’t suppose banking folk can be expected to have understood this in 1986.

Actually, even that makes little sense, since such a counterparty wouldn't be obliged to close out at all, but could just suspend its obligations under Section {{isdaprov|2(a)(iii)}} - something which it can (or could, at any rate, when the 20 day notice period was devised, in 1987) do indefinitely.

So we get back to an alternative, more tedious explanation. It is pure flannel.