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{{isdaprov|Credit Support}} may take the form of margin “posted” by the counterparty itself against its own exposure and [[guarantee]]s, [[keep-well]]s and [[letters of credit]] provided by third parties on the counterparty’s behalf. | {{isdaprov|Credit Support}} may take the form of margin “posted” by the counterparty itself against its own exposure and [[guarantee]]s, [[keep-well]]s and [[letters of credit]] provided by third parties on the counterparty’s behalf. | ||
{{isdaprov|Events of Default}} and {{isdaprov|Termination Events}} entitle | {{isdaprov|Events of Default}} and {{isdaprov|Termination Events}} entitle you to [[close out]] {{isdaprov|Transactions}} early, should your counterparty ''not'' perform (or should its creditworthiness deteriorate in oblique ways your credit department believes increase its risk of not performing). | ||
Most Events of Default and Termination Events address | Most Events of Default and Termination Events, therefore, address that credit deterioration, but not all: some deal with other externalities — [[change in law]], [[force majeure]], [[Tax|adverse tax]] — that don’t directly affect either party’s credit position. | ||
======Expected events and tail events====== | ======Expected events and tail events====== | ||
We can, in any case, distinguish between | We can, in any case, distinguish between “expected events” and “[[tail events]]”. | ||
“Expected events” are | “Expected events” are welcome: we assume these explicitly, by entering the Transaction. They are economic events that may happen to the instruments [[underlier|underlying]] our Transaction. If they do not turn out as we hoped, we have no complaint: that was the bargain we struck. | ||
Expected events tend to be particularised, delimited and finely detailed. They need to be: they directly affect what you pay or receive under the Transaction, so their articulation must be exact and important. Interestingly, documentation is generally left to trading and operations staff, not legal staff. Their drafting conventions have been tested to destruction over thirty years. The rate of outright dispute on the meaning of trade terms in confirmations is generally low, and their resolution is typically quick and pragmatic. Lessons are learned: trade terms winnow themselves down to the genuinely critical over time. | |||
“Tail events” are the externalities: things that might get in the way of you enjoying the financial risk and reward of the expected events. | “Tail events” are the externalities: things that might get in the way of you enjoying the financial risk and reward of the expected events. | ||