Specified Transaction - ISDA Provision
2002 ISDA Master Agreement
Section Specified Transaction in full
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- Specifically to include things we have thunk of since 1992, such as futures, credit derivatives, repo, stock lending, weather derivatives, NDFs, transactions executed under terms of business; and
- Generally to include similar transactions that are presently or in future become common in the financial markets — a neat a catch-all, designed to include any future pieces of financial wizardry (and/or mass destruction) that have not been thunk of just yet.
Credit support annexes?
We are going to go out on a limb here and say that little parenthetical “(including an agreement with respect to any such transaction)” is, if not deliberately designed that way, is at least calculated to capture failures under a credit support annex which, yes, is a Transaction under an ISDA Master Agreement but no, is not really a swap or anything really like one.
There is enough chat about Credit Support Providers (yes, yes, the counterparty itself is of course not a Credit Support Provider) to make us think, on a fair, large and liberal interpretation, that a default under the CSA to a swap Transaction is meant to be covered.
Specified Transactions are those financial markets transactions between you and your counterparty other than those under the present ISDA Master Agreement, default under which justifies the wronged party closing out the present ISDA. “Specified Transactions” therefore specifically exclude Transactions under the ISDA itself for the sensible reason that a default under those is covered by by Failure to Pay or Deliver and Breach of Obligation. It might lead to a perverse result if misadventure under an ISDA Master Agreement Transaction which did not otherwise amount to an Event of Default, became one purely as a result of the DUST provision, however unlikely that may be.
Enter the fiddlers
ISDA’s verbal profligacy won’t stop enthusiastic credit officers amplifying the list even further, of course. What about precious metal transactions? Letter of credit reimbursement obligations? Indebtedness? What indeed?
An odd cognitive dissonance
The framers of DUST deliberately neglected to include borrowed money or indebtedness, because these are picked up under the wider scope of the Cross Default provision which, of course, applies to indebtedness your counterparty owes to anyone, not just you. Still, there is weirdness: Cross Default contemplates a Threshold Amount before it can be triggered. DUST doesn’t. So this leads to an odd gap:
- A (sub Threshold Amount) default under Specified Indebtedness between the two contractual parties would not entitle the innocent party to close out;
- A default under any other Specified Transaction between them would even if a smaller quantum of default. This is kind of counterintuitive. If you were to define DUST to include indebtedness, of course, you'd be covered.
- Oh, look! Anyone remember Enron? Anyone feeling nostalgic for the good old days when men were men, fraud was fraud, financial accountants were profit centres and anything seemed possible? No?
- In the sense of being “likely”.