Template:20 days notice ISDA: Difference between revisions

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 and does 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 pull its trigger, 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]]<ref>A correspondent writes pointing out — quite correctly — that, once an {{isdaprov|Event of Default}} has happened, the option to send a {{isdaprov|6(a)}} Notice is [[American option|''American'']]. So it is — thanks to Section {{isdaprov|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.

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 notice period was devised, in 1987) do indefinitely. To be sure, a {{isdaprov|2(a)(iii)}} suspension is just that — a suspension; should one come eventually to terminate the {{isdaprov|Transaction}}, those as-yet unperformed obligations will come back to haunt you as {{isdaprov|Unpaid Amount}}s, but at least here you retain control of the process and timing of close-out: it is an [[American option]], not a [[European option|European]] one. If you see the market moving against you, you can cash in your chips. So, ask yourself which is a bigger punt: that, the [[mark-to-market]] value you determine in 20 days — in a market that is likely to be a flaming wreck, by the way — better suits your book than the one you can actually trade on today, or on any day between now and that distant {{isdaprov|Early Termination Date}}?