Template:20 days notice ISDA: Difference between revisions

{{quote|Each {{{{{1}}}|Close-out Amount}} will be determined as of the {{{{{1}}}|Early Termination Date}} ''or, if that would not be [[commercially reasonable]], as of the date or dates following the {{{{{1}}}|Early Termination Date}} as '''would''' be [[commercially reasonable]]''.<ref>This is in the definition of {{{{{1}}}|Close-out Amount}} ({{2002ma}}) and {{isda92prov|Loss}} ({{1992ma}}). Curiously, {{isda92prov|Market Quotation}} in the {{1992ma}} does it slightly differently, saying “The party making the determination (or its agent) will request each {{isda92prov|Reference Market-maker}} to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) ''on or as soon as reasonably practicable after the relevant {{isda92prov|Early Termination Date}}''.” We ''guess'' that gives a bit of flexibility, but is not quite so clear-cut. We suppose the point is that the {{isda92prov|Non-Affected Party}} can presumably hit the prices offered by the {{isda92prov|Reference Market Maker}}s — making the enormous assumption any will actually provide a price — and so isn’t subject to any market risk; which is good. But on the other hand, block-trading a huge portfolio on an arbitrary day you had to set because of the random requirement for “not more than 20 days” is hardly calculated to help the Defaulting Party. You would like to think common-sense would prevail for those dinosaurs still on the {{1992ma}}, who are using the {{isda92prov|Market Quotation}} concept. Then again, the fact that they are still on a {{1992ma}} twenty years after it was superseded suggests somewhat that common sense may be lacking somewhere in the relationship. </ref>}}

Remember the {{isdama}} was invented by banking folk: people who who view the Cosmos chiefly through the prism of [[indebtedness]]<ref>Hence, a {{{{{1}}}|Cross Default}} clause in the {{isdama}}. 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. There is nothing to be gained by waiting around: interest continues to accrue, at a penalty rate: the longer I take to terminate my [[exposure]], the larger it is likely to be.

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 pull its trigger, the {{{{{1}}}|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]]<ref>A correspondent writes pointing out — quite correctly — that, once an {{{{{1}}}|Event of Default}} has happened, the option to send a {{{{{1}}}|6(a)}} Notice is [[American option|''American'']]. So it is — thanks to Section {{{{{1}}}|2(a)(iii)}}, a potentially open ended one — until you convert it into something ''like'' a [[European option]] by sending the notice and specifying a date in the future on which it takes place.</ref> — of course, and not the sort of thing a prudent risk manager would do,<ref>The silly [[FT book about derivatives|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.