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Amwelladmin (talk | contribs) (Created page with "===“by not more than 20 days’ notice”=== What is the significance of the ''maximum'' notice period of '''20 days''' that one may use to close...") |
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Now, this is deep [[ISDA]] lore. It is of the First {{sex|Men}}<ref>I know, I know — ''or'' women, but that spoils the Game of Thrones reference, you know?</ref>. As such — since they didn’t have a written tradition back then in 1986; legends were passed down orally from father to son and much has been lost to vicissitude and contingency — it is not a subject on which there is much commentary. That dreadful [[FT book about derivatives]] sagely notes that usually notice is given much sooner than 20 days — I mean,. you don’t say — but doesn't give a reason for this curious outer bound. Nor does the User’s Guide to the 2002 {{isdama}}. | Now, this is deep [[ISDA]] lore. It is of the First {{sex|Men}}<ref>I know, I know — ''or'' women, but that spoils the Game of Thrones reference, you know?</ref>. As such — since they didn’t have a written tradition back then in 1986; legends were passed down orally from father to son and much has been lost to vicissitude and contingency — it is not a subject on which there is much commentary. That dreadful [[FT book about derivatives]] sagely notes that usually notice is given much sooner than 20 days — I mean,. you don’t say — but doesn't give a reason for this curious outer bound. Nor does the User’s Guide to the 2002 {{isdama}}. | ||
One is just expected to know. | One is just expected to ''know''. | ||
Well, companions, just now knowing things is not how we contrarians roll. So, in the absence of a credentialised source for the reason, let us speculate. | Well, companions, just now knowing things is not how we contrarians roll. So, in the absence of a credentialised source for the reason, let us speculate. | ||
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Remember the {{isdama}} was invented by banking folk: people who who view the cosmos chiefly through the prism of [[indebtedness]]<ref>Hence, a {{isdaprov|Cross Default}} clause in the [[ISDA]]. Well — can you think of another reason for it?</ref>. A [[lender]] whose [[borrower]] has defaulted will not dilly dally: she will bang in a default notice and seize whatever assets she can get her hand in poste haste. I lend, you owe. I don’t muck about. Breakage costs on a loan are easy to calculate and they are not especially volatile. The longer i take to terminate my exposure and set about recovering, the larger my exposure is likely to be. | Remember the {{isdama}} was invented by banking folk: people who who view the cosmos chiefly through the prism of [[indebtedness]]<ref>Hence, a {{isdaprov|Cross Default}} clause in the [[ISDA]]. Well — can you think of another reason for it?</ref>. A [[lender]] whose [[borrower]] has defaulted will not dilly dally: she will bang in a default notice and seize whatever assets she can get her hand in poste haste. I lend, you owe. I don’t muck about. Breakage costs on a loan are easy to calculate and they are not especially volatile. The longer i take to terminate my exposure and set about recovering, the larger my exposure is likely to be. | ||
But, but, but. ISDAs are different. They are not, principally<ref>{{hawf}}</ref>, a contract of [[indebtedness]], and while a large uncollateralised [[mark-to-market]] [[exposure]]<ref>Such as the sort you could have if it were 1987 and the [[credit support annex]] ''hadn't been invented''.</ref> is economically the ''same'' as indebtedness, the contract is bilateral, and who is indebted at any time is dependent on the net exposure: it can swing around. | But, but, but. [[ISDA|ISDAs]] are different. They are not, ''principally''<ref>{{hawf}}</ref>, a contract of [[indebtedness]], and while a large uncollateralised [[mark-to-market]] [[exposure]]<ref>Such as the sort you could have if it were 1987 and the [[credit support annex]] ''hadn't been invented''.</ref> is economically the ''same'' as indebtedness, the contract is bilateral, and who is indebted at any time is dependent on the net exposure: it can swing around. | ||
Also, the [[mark-to-market]] exposure on swap {{isdaprov|transaction}} is a wildly volatile thing: With a [[loan]], less so: you know you have (a) principal, (b) accrued interest and (c) break costs — the last of which might be significant for a long term fixed rate loan<ref>But are there such things in this day and age? Serious question.</ref>, but generally will pale in comparison to the principal sum owed. | |||
So a swap counterparty who terminates might be [[out of the money]], and disinclined to terminate just now, hoping that a more benign market environment might be just around the corner to dig it out of its hole so that when it does terminate, the {{isdaprov|Close-Out Amount}} will be favourable. This is still taking quite the market punt on a bust counterparty — by means of a [[European Option - Equity Derivatives Provision|European option]] — of course, and not the sort of thing a prudent risk manager would do<ref>The silly FT book is right about this, to be fair.</ref>, but I don’t suppose banking folk can be expected to have understood this in 1986. | |||
Actually, even that makes little sense, since such a counterparty wouldn't be obliged to close out at all, but could just suspend its obligations under Section {{isdaprov|2(a)(iii)}} - something which it can (or could, at any rate, when the 20 day notice period was devised, in 1987) do indefinitely. | |||
So we get back to an alternative, more tedious explanation. It is pure flannel. | |||