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===[[Consideration]]=== | ===[[Consideration]]=== | ||
The [[consideration]] given for terminating one contract and creating the other are related: In effect, there will be a [[MTM]] value payable to or from the [[transferor]] under the first, and an equal payment to or from the [[remaining party]] under the second, so [[transferor]] and [[transferee]] settle these payments directly between each other. [[Remaining party]]’s obligation to discharge [[transferor]] of its liabilities under the terminating {{t|contract}} is conditional on [[transferee]]’s agreement to accept the identical liabilities under the new [[contract]]. | The [[consideration]] given for terminating one contract and creating the other are related: In effect, there will be a [[MTM]] value payable to or from the [[transferor]] under the first, and an equal payment to or from the [[remaining party]] under the second, so [[transferor]] and [[transferee]] settle these payments directly between each other. [[Remaining party]]’s obligation to discharge [[transferor]] of its liabilities under the terminating {{t|contract}} is conditional on [[transferee]]’s agreement to accept the identical liabilities under the new [[contract]]. | ||
===[[Assignment and assumption]] agreement=== | |||
Counterparties to [[equity derivatives]] worry a lot about tax. When reorganising their derivatives portfollios between their prime brokers, they are given to the concern that a standard [[ISDA]] novation may be a “taxable event” by terminating the existing [[in-the-money]] transactions at a profit, thereby realising a taxable gain that might not (yet) have arisen had the {{isdaprov|Transaction}} just carried on as it was. | |||
Whether this is true or not is a matter for local [[tax attorney]]s — fools rush in where ''they'' fear to tread — but, the [[battle of form and substance|battle of form over substance]] being what it is, you would like to think one could mount a sensible argument that seeing as a fund’s net market exposure before and after a [[novation]] doesn’t change, the novation should be tax neutral, but — [[chicken licken]] and all that. | |||
Anyhow, one hopeful — but, to these cynical eyes, foolish — solution is to document the transfer not as a novation but an “[[assignment and assumption]]”, where the outgoing party assigns its rights, the incoming party assumes its obligations, and an infinitesimal moment later the outgoing party gracefully steps away into the night, propelled by the good wishes, respect, discharges and hold harmlesses of those remaining, and somehow the {{isdaprov|Transaction}} is is not terminated but granted perpetual existence through this whole surgical procedure transferred as a live organism from the heart of the retiring counterparty into the rib cage of the incoming one. | |||
This is a lovely, imaginative solution. It is bold, hearty, superficially attractive, and endlessly fascinating, rather like one of those M. C. Esher tuning forks. Like an Esher tuning fork, you can easily commit it to paper, and it can please the easily gulled. For the same reason — because it is conceptually impossible — it cannot work. | |||
But is a [[novation]] different from an [[assignment and assumption]] agreement? | |||
===Trick for young players=== | ===Trick for young players=== | ||
This is where one where unless you are careful, you may need to rely, more heavily that you would like, on the [[legal eagle]]’s old friend [[mutatis mutandis]]. | This is where one where unless you are careful, you may need to rely, more heavily that you would like, on the [[legal eagle]]’s old friend [[mutatis mutandis]]. | ||