Specified Indebtedness - 1992 ISDA Provision

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1992 ISDA Master Agreement
A Jolly Contrarian owner’s manual

Definition of Specified Indebtedness in a Nutshell
Use at your own risk, campers!

Specified Indebtedness” means any borrowed money.
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Definition of Specified Indebtedness in full

Specified Indebtedness” means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money.
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Related agreements and comparisons

Related Agreements
Click here for the text of Section Specified Indebtedness in the 2002 ISDA
Comparisons
For what it’s worth, oh ye of little faith: Click to compare this section in the 1992 ISDA and 2002 ISDA.

Resources and navigation

Resources Wikitext | Nutshell wikitext | 2002 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA
Navigation Preamble | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
Events of Default: 5(a)(i) Failure to Pay or Deliver5(a)(ii) Breach of Agreement5(a)(iii) Credit Support Default5(a)(iv) Misrepresentation5(a)(v) Default Under Specified Transaction5(a)(vi) Cross Default5(a)(vii) Bankruptcy5(a)(viii) Merger Without Assumption
Termination Events: 5(b)(i) Illegality5(b)(ii) Tax Event5(b)(iii) Tax Event Upon Merger5(b)(iv) Credit Event Upon Merger5(b)(v) Additional Termination Event

Index — Click ᐅ to expand:

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Content and comparisons

No change to this definition between the 1992 ISDA and the 2002 ISDA. This clause is only really relatable in the context of Cross Default Event of Default, of which it is a component.
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Summary

Specified Indebtedness is a simple and innocuous enough provision. Almost redundant, you’d think — why go to the trouble of defining “borrowed money” as another term? (Answer: because many firms, in their wisdom, will wish to change the definition in the Schedule to include derivatives, other trading exposures, things owed to their affiliates, or even any payment obligations of any kind, and for those people, “Specified Indebtedness” is a (somewhat) less loaded term.

Derivatives as Specified Indebtedness

Be wary of including derivatives or other non-debt-like money payment obligations in the definition of Specified Indebtedness, no matter how high a Threshold Amount. We would say never do it, but the wise minds of the credit department may well be beyond your calming influence, so you may not have a choice. But if you have a choice, don’t do it.

In its unadulterated formulation, Cross Default aggregates up all Transaction-level defaults, so even though a single ISDA Master Agreement would be unlikely to have a net out-of-the-money MTM of anywhere near the Threshold Amount, a large number of individual Transaction MTMs, if aggregated, may — particularly if you’re selective about which Transactions you’re counting — which Cross Default entitles you to be.

Thus, where you have a large number of small failures, you can still have a big problem. (This is why banks should also carve out deposits: operational failure or regulatory action can create an immediate problem).

Now it is true that you can require the Specified Indebtedness of a master trading agreement to be calculated by reference to its net close-out amount, but this only really points up the imbalance between buy-side and sell-side. Sure, fund managers may have fifty or even a hundred ISDA Master Agreements, but they will be split across dozens of different funds., each a different entity with its own Threshold Amount. Broker-dealers, on the other hand, will have literally hundreds of thousands of master agreements, all facing the same legal entity. Credit dudes: you are the wrong side of this risk, fellas.

Now seeing as most master trading agreements are fully collateralised, and so don’t represent material indebtedness on a netted basis anyway, it may be that even with hundreds of thousands of the blighters, no-one’s Threshold Amount will ever be seriously threatened. But if no Threshold Amount is ever at risk from an ISDA Master Agreement, then why are you including the ISDA Master Agreement in Specified Indebtedness in the first place?

O tempora. O paradox.

Stock loans and repo as Specified Indebtedness

In any case, what should one make of “borrowed money”? Could it include repo and stock loan obligations under securities financing transactions? Amounts owed to trade creditors? (In each case no, according to Simon Firth - see here).

Initial margin: a trick for young players

What of a failure to pay an Independent Amount? Technically this is not a payment of indebtedness, and if the IM payer is up-to-date on variation margin payments, there may not be any indebtedness at all. Indeed, once the IM payer has paid required IM, the IM receiver becomes indebted to the payer for the return of the initial margin — so while it certainly comprises a failure to pay when due, the value of the Specified Indebtedness that failure contributes to the Threshold Amount might be nil, or even negative. This, your risk people will say, is why one should widen Specified Indebtedness to include all payment obligations, but that, for a host of reasons you can find here — is whopping great canard a l’orange in this old contrarian’s opinion.
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General discussion

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See also

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References