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| This is a tail event. This is what all the meaningful terms in your legal agreements are designed to protect you against. | | This is a tail event. This is what all the meaningful terms in your legal agreements are designed to protect you against. |
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| ====Derivatives trading====
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| A swap being a private, bilateral affair, the most obvious category of tail events is “things which mean your counterparty cannot, or will not, or has not, performed its end of the deal”.
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| Straight out refusal to — repudiation — is rare, at least without the cloak of some kind of dispute as to whether the party was under such an obligation in the first place.
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| Inability is the main player here: generally captured by insolvency, and correlative defaults under other agreements.
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| Much of financial services being a play on [[leverage]] — the name of the game being to earn more, with other people’s money, than it costs you to borrow it — many market participants flirt with various formulations of [[insolvency]] as a basic business model, so there tend to be some pushback on the parameters of these correlative failures and “ostensible inabilities” to perform. Much of a [[negotiator]]’s life is spent haggling about them.
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| Where refusal or inability to perform cannot be proven, actual failure to pay or deliver ends all arguments. If you ''actually'' haven’t performed, it no longer matters ''why''.
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| There is therefore a sort of hierarchy of these events. Actual default — {{isdaprov|Failure to Pay or Deliver}} — is the safest, and most common, default trigger. {{Isdaprov|Bankruptcy}} is the next — though there is more looseness around some of its limbs, an administrator actually being appointed, or a petition actually being filmed is clean, public and unlikely to prompt many arguments.
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| Inasmuch as a {{isdaprov|Failure to Pay or Deliver}} arises because of a cashflow crisis — you don’t have available funds to meet your obligations — it likely counts as a “soft” {{isdaprov|Bankruptcy}} too: an “inability to pay debts as they fall due”. This shouldn’t usually matter but bear in mind it might trigger a carelessly articulated (1987-style) {{isdaprov|Automatic Early Termination}}. Also, if you have carefully provided for some disincentive to failure, such as a penal close-out methodology on {{isdaprov|Failure to Pay or Deliver}} (''why'' anyone would do this heaven only knows, but JC has seen it so let’s say) then if it is a bankruptcy (or even leads to one within a preference period you may find you have written a [[voidable preference]] into your swap,even if it isn’t an unenforceable penalty.
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| {{Isdaprov|Default Under Specified Transaction}} — that transaction being one to which you are directly a party,
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| The remaining events are sketchy and unpopular, depending as they do on private information you most likely won’t have about thresholds you can’t easily calculate. We may argue till we are hoarse about Cross Default. We will not invoke it.
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| =====Externalities=====
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| There are a category of events which make it impossible even for a solvent counterparty to perform. Change in law, for example — it is not beyond possibility that certain kinds of swaps might be restricted or outlawed altogether<ref>Not long ago the European Union proposed restricting the carbon market to “end users” to discourage financial speculation, for example. This would have rendered certain forward contracts in {{euaprov|Allowances}} involving delivery to non-users illegal.</ref> or Tax events that make the transaction uneconomic as originally envisaged.
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| Secondary events of this kind — things that limit a dealer’s ability to hedge, or materially increase its costs of doing so, tend not to be Termination Events partly this reflects a fact not often stated, but nonetheless true: there is a price at which the parties will agree to terminate any swap. Just because a party doesn’t have an economic option to terminate the trade doesn’t mean it can’t terminate the trade. It always has an “at market” option. In liquid markets during times of fair weather this is a source of great comfort; in illiquid markets and at times of stress, less so. A dealer will say, “I will always show you a price. You just might not mind the price, is all.”
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| Customers have less incentive to break trades if it means realising
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| {{sa}} | | {{sa}} |
| *[[The map and the territory]] | | *[[The map and the territory]] |
| {{ref}} | | {{ref}} |