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Template:Cross default in securities financing agreements: Difference between revisions
Template:Cross default in securities financing agreements (view source)
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===There is no cross default in a securities financing transaction=== | |||
There’s no need for [[cross default]] in ''any'' [[master trading agreement]], actually — this is the [[JC]]’s considered view, about which you can read at length elsewhere — but the {{gmsla}} and {{gmra}} are a particularly bad candidates for cross default because their transactions are by definition short term (in the case of {{gmra}}) and on call (in the case of {{gmsla}}), so the “mischief” the [[cross default]] is designed to remedy — large [[credit exposure]] under transactions with long tenor and few regular cash-flows — does not exist. | There’s no need for [[cross default]] in ''any'' [[master trading agreement]], actually — this is the [[JC]]’s considered view, about which you can read at length elsewhere — but the {{gmsla}} and {{gmra}} are a particularly bad candidates for cross default because their transactions are by definition short term (in the case of {{gmra}}) and on call (in the case of {{gmsla}}), so the “mischief” the [[cross default]] is designed to remedy — large [[credit exposure]] under transactions with long tenor and few regular cash-flows — does not exist. | ||
[[Cross default]], remember, is a banking concept, designed to protect [[Lender|lenders]] who have unsecured [[credit exposure]] to [[Borrower|borrowers]] under fixed rate [[Loan|loans]] where the only material payments will be regular [[interest]] payments, which might be as infrequent as quarterly, semi-annual or even annual. If the lender knows the borrower has defaulted on material [[indebtedness]] to another [[lender]], it will not want to wait nine months to see if there is a [[failure to pay]] on its own [[Loan|facility]]. Hence, a [[cross default]] right. | [[Cross default]], remember, is a banking concept, designed to protect [[Lender|lenders]] who have unsecured [[credit exposure]] to [[Borrower|borrowers]] under fixed rate [[Loan|loans]] where the only material payments will be regular [[interest]] payments, which might be as infrequent as quarterly, semi-annual or even annual. If the lender knows the borrower has defaulted on material [[indebtedness]] to another [[lender]], it will not want to wait nine months to see if there is a [[failure to pay]] on its own [[Loan|facility]]. Hence, a [[cross default]] right. | ||
[[SFT - SFTR Provision|SFTRs]] are collateralised daily, so: | ===There’s no need to put one in. Even if you are doing [[term loan|term loans]].=== | ||
To be clear: the omission of [[cross default]] from the standard [[SFT - SFTR Provision|SFT]] agreements ''was not an error''. It was deliberate. There is a certain stripe of [[Credit Officer]] who is not convinced of this, however, and may want to put one in. Does it do any harm? Well yes, actually: it creates [[contingent liquidity]] issues for your own treasury people, whom credit will routinely ignore when making their credit requests. And yes, from the perspective of production waste in the negotiation process: insisting on a cross default is, par excellence, the [[waste]] of {{wastearticle|over-processing}}. | |||
Why not put one in for good measure? [[SFT - SFTR Provision|SFTRs]] are collateralised daily, so: | |||
*Neither party has material exposure<ref>Okay, okay, a {{gmslaprov|borrower}} under an [[agent lending]] transaction may have a significant exposure across all {{gmslaprov|lender}}s due to aggregated [[collateral]] [[Haircut|haircuts]], but that is by definition diversified risk, and the {{gmslaprov|borrower}} can generally break term transactions.</ref>; | *Neither party has material exposure<ref>Okay, okay, a {{gmslaprov|borrower}} under an [[agent lending]] transaction may have a significant exposure across all {{gmslaprov|lender}}s due to aggregated [[collateral]] [[Haircut|haircuts]], but that is by definition diversified risk, and the {{gmslaprov|borrower}} can generally break term transactions.</ref>; | ||
*There will usually be payment flows happening daily as loaned {{gmslaprov|Securities}} and {{gmslaprov|Collateral}} values move around with the market, creating collateral transfers; and | *There will usually be payment flows happening daily as loaned {{gmslaprov|Securities}} and {{gmslaprov|Collateral}} values move around with the market, creating collateral transfers; and | ||
*Even if there aren’t, either party can recall the loans on any day<ref>Unless they are term transactions, but even there the terms tend to be short — ninety days is a maximum — and see above re usual daily [[collateral]] flows.</ref> | *Even if there aren’t, either party can recall the loans on any day<ref>Unless they are term transactions, but even there the terms tend to be short — ninety days is a maximum — and see above re usual daily [[collateral]] flows.</ref> | ||