Template:Csa Dispute Resolution summ: Difference between revisions

In its {{vmcsa}} ISDA not only passed up the opportunity to make this unused-in-practice language simpler, but [[bloody-minded]]ly made it worse, by providing anally-retentive alternatives for {{2002isda}} and {{1992isda}} close-out methodologies. Which is just spectacular.

DON’T LET IT. The dispute can be as to one of two things:  

''Value of Eligible Credit Support'': The {{{{{1}}}|Value}} of posted (or to-be-transferred) {{{{{1}}}|Eligible Credit Support}}; or

''Value of the Exposure'': The {{isdaprov|Transaction}}’s {{{{{1}}}|Value}} (when calculating {{{{{1}}}|Exposure}}).

====={{{{{1}}}|Credit Support}} Value=====

Let's take the easy one first: {{{{{1}}}|Eligible Credit Support}}. If you are a smart sort of fellow who has moved onto a cash-only single-currency {{vmcsa}} then there’s not really much to argue about. What is the {{{{{1}}}|Value}}, in the {{{{{1}}}|Base Currency}}, of an amount in that {{{{{1}}}|Base Currency}}?<ref>Hint: it’s not a trick question</ref>. It’s not exactly a stumper, is it?

The {{isdaprov|Transaction}} {{isdaprov|Exposure}} has — potentially — a different complexion. While some asset classes ([[FX]], [[synthetic equity]]) are pretty liquid and observable and, in the same way, there is not much to argue about, others are not. The less liquid a transaction is (a tranched {{cdo3}} anyone?), the more likely the broker is to refuse any dispute rights when carrying out its {{isdaprov|Calculation Agent}} function under the {{tag|ISDA}}. The logic runs like this:

“Dude, this transaction is ''insanely'' complicated and we are marking to our own model. There’s no way some other guy will understand the trade or accurately value it, and in any case, the valuation relies on our own proprietary model which is so amazing we’re not going to share with our competitor anyway.”

This attitude is less common these days that swap trading is an unglamorous utility in a trading division which is only really there to support your wealth management offering, of course. And really, where you do see it, you have a bigger problem, which is you are entrusting your cash to some whizzkid who has sold you a pup. If it is so complex only this guy’s Excel spreadsheet can possibly understand it it is like --- did he show you any [[backtesting]] to get you across the line?

So doesn’t the self-help valuation model under the CSA drive a [[Coach & Horses|coach and horses]] through the carefully constructed {{isdaprov|Calculation Agent}} language on which the [[broker]] counterparty has just insisted, to the point of threatening to [[I'm not going to die in a ditch about it|die in a ditch about it]]?

*Firstly, the dispute mechanism in the CSA, while fulsome, reflects the uncynical attitude of yesteryear in its aspirations for what third party {{isdaprov|Reference Market-Makers}} will be prepared to do to help a fellow market participant out.  

*It depends on the better angels of a {{isdaprov|Reference Market-maker}}’s nature — nay, those of ''four'' of the blighters — in providing [[firm quotation]]s to be dissected, arithmetically averaged and arranged for the delight of all. But a moment’s reflection should tell you that {{isdaprov|Reference Market-maker}}s don’t ''have'' a better nature. They are certain not to provide a quote, which brings them no benefit (they can’t get a trade out of it) and saddles them with risk — albeit only the [[Chicken Licken]] sort of risk that [[Mediocre lawyer|assiduous attorneys]] like to busy themselves, namely the fear that one’s well-meaning [[bad faith]]<ref>I ''know'' this is a contradiction in terms.</ref> or [[negligence]] has somehow caused compensatable harm to the interests of another market participant<ref>The best defence to such an action, if you were wondering, is not to act in bad faith and to be competent in what you do. But that’s as may be: [[Chicken Licken]] is really only the excuse one wheels out for not wasting time doing something for which you get no benefit.</ref>.

So all this careful language really boils down to “the party calling for collateral decides” which seems wildly one-sided until you realize that a trading relationship is — well — a ''relationship'', and absent a material risk of outright failure (in which case, the value of [[mark-to-market]] exposures are a problem only when your counterpart has failed to honour them), the lure of a continued trading relationship, professional courtesy, and being a [[good egg]]  — the [[commercial imperative]], that is —are the practical mitigants against unconscionable behaviour.