Template:M summ 2018 CSD 13(h): Difference between revisions

Jump to navigation Jump to search

Template:M summ 2018 CSD 13(h) (view source)

Revision as of 09:00, 17 March 2022

3,568 bytes removed ,  17 March 2022
no edit summary
No edit summary
No edit summary
Line 2: Line 2:


With this provision it looks like the ’squad got to the point of maximum disarray, with all rocks upturned and slaters, bugs and cockroaches scuttling everywhere, and it just had a tantrum and stormed off. These provisions don’t even make ''sense''. They are not even ''grammatical''.  
With this provision it looks like the ’squad got to the point of maximum disarray, with all rocks upturned and slaters, bugs and cockroaches scuttling everywhere, and it just had a tantrum and stormed off. These provisions don’t even make ''sense''. They are not even ''grammatical''.  
===The basic problem===
===The basic problem, part I===
The problem to be solved is this: [[initial margin]] is designed to cover [[mark-to-market]] [[exposure]] between (usually daily) [[variation margin]] calls. It is usually calculated to cover the likely possible change in portfolio value over that “liquidity period”, given the potential drop in collateral value over the same period. That is, ''one day''.
The problem to be solved is this: [[initial margin]] is designed to cover [[mark-to-market]] [[exposure]] between (usually daily) [[variation margin]] calls. It is usually calculated to cover the likely possible change in portfolio value over that “liquidity period”, given the potential drop in collateral value over the same period. That is, ''one day''.


Line 10: Line 10:


But fundamentally, this is just one of those risks it would be lovely to banish, but you can’t. Sorry, regulators!
But fundamentally, this is just one of those risks it would be lovely to banish, but you can’t. Sorry, regulators!
===The basic problem part II===


===What were they ''trying'' to achieve? go figure.===
===What were they ''trying'' to achieve? go figure.===
Line 21: Line 23:
Until the {{isdama}} has been fully closed out and the {{isdaprov|Early Termination Amount}} — that is, the total amount due following termination and valuation of all {{isdaprov|Transaction}}s following the default —  determined, you don’t definitively know what you are owed — even ''if'' you are owed anything: only one party to an {{isdama}} can be owed something, remember — so until then, what business have you got appropriating the {{imcsdprov|Initial Margin}}? Nor do you have any credit risk over it: it is held at a third party and [[secured]] in your favour. ''Cool your jets''.
Until the {{isdama}} has been fully closed out and the {{isdaprov|Early Termination Amount}} — that is, the total amount due following termination and valuation of all {{isdaprov|Transaction}}s following the default —  determined, you don’t definitively know what you are owed — even ''if'' you are owed anything: only one party to an {{isdama}} can be owed something, remember — so until then, what business have you got appropriating the {{imcsdprov|Initial Margin}}? Nor do you have any credit risk over it: it is held at a third party and [[secured]] in your favour. ''Cool your jets''.


But that event — by our read, a “Failure to Pay Early Termination Amount” — isn’t even the default value for a {{imcsdprov|Secured Party Rights Event}}: rather, it is one of a tangled menu of alternatives.  
But that event — by our read, a “Failure to Pay Early Termination Amount” — isn’t even the default value for a {{imcsdprov|Secured Party Rights Event}}: rather, it is one of a tangled menu of alternatives.
===The alternatives===
====As-standard: a “designated Early Termination Date”====
The as-standard Secured Party Rights Event in the {{imcsd}} is the designation of an {{isdaprov|Early Termination Date}} in respect of all {{isdaprov|Transaction}}s following an {{isdaprov|Event of Default}} but — unless designated as an “{{imcsdprov|Access Condition}}” — not a ''normal'' {{isdaprov|Termination Event}} or an [[Additional Termination Event - ISDA Provision|''Additional'' Termination Event]].  For what it is worth, “Access Conditions” are a list of Termination Events and Additional Termination Events set out in Paragraph 13(e)(ii) for each of which one can opt — severally for each party — in your elections. What on earth {{icds}} managed to achieve with such pointless, fine-grained optionality (other than a sumptuous lifestyle for the hoardes of [[legal eagle]]s who will feast on client negotiations as a result) it is hard to say.
 
In any case, just as a piece of design this is cruddy: ''any'' event leading to the early termination of all outstanding {{isdaprov|Transaction}}s, should count as a {{imcsdprov|Secured Party Rights Event}}, since at that point you are off risk, right? And before you complain that this is too wide, since there may still be amounts undetermined, or not as yet due under those {{imcsdprov|Transaction}}s, well, yes: that is exactly why the {{isdaprov|Early Termination Date}} is the wrong trigger point in the first place.
 
''Why do you need to appropriate {{imcsdprov|Initial Margin}} before you know if you are actually owed anything?
====Failing that: “{{imcsdprov|Failure to Pay Early Termination Amount}}”====
(Quick drafting point: this means that a party fails to pay its {{isdaprov|Early Termination Amount}} once it has been determined, not that there is an {{isdaprov|Early Termination Amount}} determined following only a {{isdaprov|Failure to Pay or Deliver}} {{isdaprov|Event of Default}}.) That being the case, this is — well, if it covered all {{isdaprov|Termination Events}}, would be — the obvious best choice: it means, beyond any doubt the counterparty really has failed, it really did owe something, and it really did fail to pay it.
 
''Now'' you have all the justification you need to wade in and repossess your counterparty’s initial margin. Only, oddly — infuriatingly — it doesn’t capture finally determined {{isdaprov|Early Termination Amount}}s that were caused by ''non''-{{isdaprov|Events of Default}} (the so-called “{{imcsdprov|Access Condition}}s”). Why, since at this point you have failed to pay the amount, and? Search me, readers.
====Failing that: “{{imcsdprov|Control Agreement Secured Party Rights Event}}s”====
If you have chosen to designate in your Control Agreement what the Secured Party’s rights to possess collateral are, then that applies, and overrides any of the disastrous trainwreck we have just picked through above.
 
===Cutting through the nonsense===
For those who don’t trust {{imcsdprov|Control Agreement}}s to do what they say on the tin, consider this kind of wording:
 
{{quote|“'''{{imcsdprov|Secured Party Rights Event}}'''” means that, following the occurrence or designation of an {{isdaprov|Early Termination Date}} with respect to all outstanding {{isdaprov|Transaction}}s, an {{isdaprov|Early Termination Amount}} payable by the {{imcsdprov|Chargor}} has been determined and notified to the {{imcsdprov|Chargor}} under Section {{isdaprov|6(d)}}, and the {{imcsdprov|Chargor}} has not paid it in full when due under Section {{isdaprov|6(d)(ii)}}.}}
Retrieved from "https://jollycontrarian.com/index.php?title=Special:MobileDiff/62466"

Navigation menu