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| {{comm}} | | {{comm}} |
| {{eventsofdefault}} | | {{eventsofdefault}} |
| ====Types of Events of Default====
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| '''Independently Verifiability''': Some {{isdaprov|Events of Default}} you can independently verify without counterparty's confirmation, for example:
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| **'''Direct breaches''': direct breaches of the Agreement (eg {{isdaprov|Failure To Pay}}; {{isdaprov|Breach of Agreement}});
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| **'''Public events''': Events which are necessarily public (most of the {{isdaprov|Bankruptcy}} limbs; {{isdaprov|Merger Without Assumption}}
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| *'''Not independently verifiable''': Some require the counterparty to tell you as they depend on facts which you could not know are not public knowledge, are not breaches of a direct obligation to the counterparty and would not otherwise come to the firm's attention: Particularly:
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| **{{isdaprov|Cross Default}}
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| **other limbs of {{isdaprov|Bankruptcy}} (eg "has a secured party take possession of all or substantially all its assets".
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| *'''"Hard" Events of default''': Hard events where some positive action has actually been taken representing a default - such as a {{isdaprov|Failure to Pay}}
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| *'''"Soft" or "Passive" Events of Default''': where a state of affairs has arisen ''permitting'' a hard {{isdaprov|Event of Default}} to be called, but it has not been designated it happened, such as {{isdaprov|Cross Default}}, where person owning the actual "hard" default right against your counterparty may not have triggered (or have any intention of triggering) it.
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| That said, and for the same reason, such "not independently verifiable" termination/default events are effectively soft anyway, even where we have such an obligation from counterparty to notify us of their occurrence, because we have no means of policing whether or not the Counterparty has in fact notified us, and therefore no practical remedy anyway if it does not. It is a self certification, after all, and all we can rely on is its moral force and the party's competence to monitor its own position and be sufficiently organised to tell us.
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| Additionally, the obligation on a Counterparty to monitor "passive" {{isdaprov|Events of Default}} like {{isdaprov|Cross Default}} (as opposed to [[cross acceleration]] where [[QED]] a defaulting party will be notified about the occurrence) is a pretty onerous one particularly for a large entity, and even more so where (as they often are for funds) derivatives are included in definition of {{isdaprov|Specified indebtedness}}.
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| Given that cross defaults may have artificially low {{isdaprov|Threshold Amount}}s (as do some of ours) and are set at levels where actual counterparties owning those rights directly are most unlikely to exercise them, it should not be a surprise to find parties resistant to notifying us about these.
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| This becomes a credit call but a practical recommendation would be:
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| #Impose notification requirement only on "active" termination/default events which are non-public and CP has no excuse for not having monitored them and counterparty has actually exercised; and
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| #If that doesn't work, agree to drop the provision altogether, as in my view its practical utility is limited to "moral" at best (as there is no effective sanction for counterparty breach anyway)
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| ===={{isdaprov|Illegality}}====
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| {{isdaprov|Illegality}} trumps {{isdaprov|Event of Default}}. Be careful where, for example, a {{isdaprov|Failure to Pay}} is occasioned by a mandatory change in law by a government having jurisdiction over one or other counterparty — see {{isdaprov|Illegality}}. Good example: Greek capital controls of June 2015.
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| ===={{isdaprov|Termination Events}} and {{isdaprov|Events of Default}}==== | | ===={{isdaprov|Termination Events}} and {{isdaprov|Events of Default}}==== |
| {{isdaprov|Termination Events}} and {{isdaprov|Events of Default}} under an {{isdama}} are similar in that when they occur to one party (the {{isdaprov|Affected Party}} or {{isdaprov|Defaulting Party}}) the other may terminate outstanding trades under the agreement. Differences: | | {{isdaprov|Termination Events}} and {{isdaprov|Events of Default}} under an {{isdama}} are similar in that when they occur to one party (the {{isdaprov|Affected Party}} or {{isdaprov|Defaulting Party}}) the other may terminate outstanding trades under the agreement. Differences: |