Template:Isda Default Rate summ

Default interest is one of those perennial things in finance and is generally a rate higher than the implied funding rate for the period and person in question. You might well ask — though one might, as the JC does, struggle heroically to not go there — whether an arbitrary loading on what ought to be a fair estimate of one’s actual carrying cost is not an unenforceable penalty, but hey, everyone does it.

Since for a default period you are not lending at term or on a fixed rate, but rather on an overnight floating rate, the sudden extension of that period for an indefinite but which you are “lending” money does not cause you any unexpected funding costs that would not be built into your ordinary floating rate.

Why is there a {{{{{1}}}|Default Rate}} in the ISDA Master Agreement? Well, folks, it had me stumped. I managed to rustle up some flakey hypotheses in the premium section, only to know them down again, but for you cheapies I had a word to the chatbots. Even NiGEL our artificially artificial intell-i-gent, struggled to think of a rationale.

Would you say the higher default interest rate is more a market convention that persists despite not having a completely solid economic rationale?

If this is the kind of sensible question a neural network comes up with, the legal eagle’s place in the firmament is safe for some time yet.