Template:Failure to pay procedure: Difference between revisions

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-===[[Closing out]] an {{isdama}} following an {{isdaprov|Event of Default}}===
+===[[Closing out]] an {{isdama}} following an {{{{{1}}}|Event of Default}}===
 Here is the [[JC]]’s handy guide to [[closing out]] an {{isdama}}. We have assumed you are [[closing out]] as a result of a {{{{{1}}}|Failure to Pay or Deliver}} under Section {{{{{1}}}|5(a)(i)}}, because — unless you have inadvertently crossed some [[Tannhäuser Gate|portal, wormhole]] into a parallel but stupider universe — if an {{isdama}} had gone toes-up, that’s almost certainly why. That, or at a pinch {{{{{1}}}|Bankruptcy}}. Don’t try telling your [[credit officer]]s this, by the way: they won’t believe you — and they tend to get a bit wounded at the suggestion that their beloved [[NAV triggers]] are a waste of space.
-In what follows “{{isdaprov|Close-out Amount}}” means, well, “{{isdaprov|Close-out Amount}}” (if under a {{2002ma}}) or “{{isda92prov|Loss}}” or “{{isda92prov|Market Quotation}}” amount (if under a {{1992ma}}), and “{{{{{1}}}|Early Termination Amount}}” means, for the {{1992ma}}, which neglected to give this key value a memorable name, “the amount, if any, payable in respect of an {{{{{1}}}|Early Termination Date}} and determined pursuant to Section {{isda92prov|6(e)}}”.
+In what follows “{{{{{1}}}|Close-out Amount}}” means, well, “{{isdaprov|Close-out Amount}}” (if under a {{2002ma}}) or “{{isda92prov|Loss}}” or “{{isda92prov|Market Quotation}}” amount (if under a {{1992ma}}), and “{{{{{1}}}|Early Termination Amount}}” means, for the {{1992ma}}, which neglected to give this key value a memorable name, “the amount, if any, payable in respect of an {{{{{1}}}|Early Termination Date}} and determined pursuant to Section {{isda92prov|6(e)}}”.
-So, to close out following a {{isdaprov|Failure to Pay or Deliver}}, you will need:
+So, to close out following a {{{{{1}}}|Failure to Pay or Deliver}}, you will need:
 ====1. There must be a failure to pay or deliver under Section {{{{{1}}}|5(a)(i)}}====
 A {{{{{1}}}|Failure to Pay or Deliver}}, by the {{{{{1}}}|Defaulting Party}} to make a payment or delivery when due on day '''T'''. This is not, yet, an {{{{{1}}}|Event of Default}} under Section {{{{{1}}}|5(a)(i)}}. But we are on the way.
 ====2. You must give notice of the failure under Section {{{{{1}}}|5(a)(i)}}====
-The {{{{{1}}}|Non-defaulting Party}} must give the {{{{{1}}}|Defaulting Party}} notice of the failure. This is ''not'' a Section {{{{{1}}}|6(a)}} notice — calm, down, we will get to that in good time — but a Section 5(a)(i) notice of failure to pay or deliver. The sainted {{isdama}} does not directly prescribe the format for this notice, but Section {{{{{1}}}|12}} cautions that it may not be by {{isdaprov|e-mail}} or {{{{{1}}}|electronic messaging system}} or (if you have a {{1992ma}}, at any rate), by [[fax]]. The proper form is to have it hand-delivered by someone prepared to swear an affidavit as to when and where they delivered it to the {{isdaprov|Defaulting Party}}.<ref>Yes, it’s true: in ISDA’s alternative universe, [[Greenclose v National Westminster Bank plc|e-mail and electronic messaging systems are different things]].</ref>
+The {{{{{1}}}|Non-defaulting Party}} must give the {{{{{1}}}|Defaulting Party}} notice of the failure. This is ''not'' a Section {{{{{1}}}|6(a)}} notice — calm, down, we will get to that in good time — but a Section 5(a)(i) notice of failure to pay or deliver. The sainted {{isdama}} does not directly prescribe the format for this notice, but Section {{{{{1}}}|12}} cautions that it may not be by {{isdaprov|e-mail}} or {{{{{1}}}|electronic messaging system}} or (if you have a {{1992ma}}, at any rate), by [[fax]]. The proper form is to have it hand-delivered by someone prepared to swear an affidavit as to when and where they delivered it to the {{{{{1}}}|Defaulting Party}}.<ref>Yes, it’s true: in ISDA’s alternative universe, [[Greenclose v National Westminster Bank plc|e-mail and electronic messaging systems are different things]].</ref>
 Since payments and deliveries are generally due at [[close of business]] on a given day, [[Q.E.D.]], a Section {{{{{1}}}|5(a)(i)}} notice of {{{{{1}}}|Failure to Pay or Deliver}} can usually only be given ''after'' [[close of business]] on the due date.
@@ Line 18: / Line 18: @@
 At this point you have a {{{{{1}}}|Potential Event of Default}}, but not an ''actual'' one.
-Once your Section {{{{{1}}}|5(a)(i)}} notice of {{{{{1}}}|Failure to Pay or Deliver}} is effective, the {{{{{1}}}|Defaulting Party}} has a “[[grace period]]” in which it may sort itself out and make the payment or delivery in question, thereby heading off a full-blown {{isdaprov|Event of Default}}.
+Once your Section {{{{{1}}}|5(a)(i)}} notice of {{{{{1}}}|Failure to Pay or Deliver}} is effective, the {{{{{1}}}|Defaulting Party}} has a “[[grace period]]” in which it may sort itself out and make the payment or delivery in question, thereby heading off a full-blown {{{{{1}}}|Event of Default}}.
-The standard [[grace period]]s are set out in Section {{{{{1}}}|5(a)(i)}}. ''Be careful'': under a {{2002ma}} the standard is '''''one''''' {{isdaprov|Local Business Day}}. Under the {{1992ma}} the standard is '''''three''''' {{isda92prov|Local Business Day}}s. ''But check the {{{{{1}}}|Schedule}}'' because in either case this is the sort of thing that counterparties adjust: {{2002ma}}s are often adjusted to conform to the {{1992ma}} standard of three {{{{{1}}}|LBD}}s, for example.
+The standard [[grace period]]s are set out in Section {{{{{1}}}|5(a)(i)}}. ''Be careful'': under a {{2002ma}} the standard is '''''one''''' {{{{{1}}}|Local Business Day}}. Under the {{1992ma}} the standard is '''''three''''' {{isda92prov|Local Business Day}}s. ''But check the {{{{{1}}}|Schedule}}'' because in either case this is the sort of thing that counterparties adjust: {{2002ma}}s are often adjusted to conform to the {{1992ma}} standard of three {{{{{1}}}|LBD}}s, for example.
 So: once you have a clear, notified {{{{{1}}}|Failure to Pay or Deliver}}, you have to wait ''at least'' one and possibly three or more {{{{{1}}}|Local Business Day}}s before doing anything about it. Therefore, you are on tenterhooks until the [[close of business]] '''T+2''' {{{{{1}}}|LBD}}s (standard {{2002ma}}), or '''T+4''' {{isda92prov|LBD}}s (standard {{1992ma}}).
@@ Line 27: / Line 27: @@
 ====4. You may now send your Section {{{{{1}}}|6(a)}} notice designating an {{{{{1}}}|Early Termination Date}} ====
-At the expiry of the Section {{{{{1}}}|5(a)(i)}} [[grace period]], you finally have a fully operational {{{{{1}}}|Event of Default}}. Now Section {{{{{1}}}|6(a)}} allows you, by ''not more than 20 days’ notice''<ref name="20days">See discussion on at Section {{isdaprov|6(a)}} about the silliness of that time limit.</ref> to designate an {{{{{1}}}|Early Termination Date}} for all outstanding {{isdaprov|Transaction}}s.
+At the expiry of the Section {{{{{1}}}|5(a)(i)}} [[grace period]], you finally have a fully operational {{{{{1}}}|Event of Default}}. Now Section {{{{{1}}}|6(a)}} allows you, by ''not more than 20 days’ notice''<ref name="20days">See discussion on at Section {{{{{1}}}|6(a)}} about the silliness of that time limit.</ref> to designate an {{{{{1}}}|Early Termination Date}} for all outstanding {{{{{1}}}|Transaction}}s.
 So, at some point in the next twenty days<ref name="20days"/> outstanding {{{{{1}}}|Transaction}}s will be at an end.<ref> By a striking oversight, not actually so named in the {{1992ma}}.</ref> Now this is a different thing from knowing what the amounts will be, much less knowing when they will be paid: this is the date ''by reference to which'' termination amounts will be calculated.
 ====5. Determine {{{{{1}}}|Close-out Amount}}s<ref name="close out amounts">Or their equivalents under the {{1992ma}}, of course.</ref>====
-One must now ascertain termination values for the {{{{{1}}}|Terminated Transaction}}s as of the {{isdaprov|Early Termination Date}} per the methodology set out in Section {{{{{1}}}|6(e)(i)}}.
+One must now ascertain termination values for the {{{{{1}}}|Terminated Transaction}}s as of the {{{{{1}}}|Early Termination Date}} per the methodology set out in Section {{{{{1}}}|6(e)(i)}}.
 Now armed with our crystalised {{{{{1}}}|Failure to Pay or Deliver}} {{{{{1}}}|Event of Default}} and with an {{{{{1}}}|Early Termination Date}} to target, we go directly to Section {{{{{1}}}|6(e)}}, noting as we fly over it, that Section {{{{{1}}}|6(c)}} reminds us [[for the avoidance of doubt]] that even if the {{{{{1}}}|Event of Default}} which triggers the {{{{{1}}}|Early Termination Date}} evaporates in the meantime — these things happen, okay? — yon {{{{{1}}}|Defaulting Party}}’s goose is still irretrievably cooked.<ref>If [[Credit department|Credit]] suddenly gets executioner’s remorse and wants to let the Defaulting Party off), the Non-defaulting Party will have to expressly terminate the close-out process, preferably by written notice. There’s an argument — though it is hard to picture the time or place on God’s green earth where a Defaulting Party would make it — that cancelling an in-flight close out is no longer exclusively in the Defaulting Party’s gift, and requires the NDP’s consent. It would be an odd, self-harming kind of Defaulting Party that would run ''that'' argument unless the market was properly gyrating.</ref>
-There is a bit of a [[chicken licken]]-and-egg situation here as you can’t really work out their [[mark-to-market]] values for that date at any time ''before'' that date, unless you are able to see into the future or something. Anyway, that’s a conundrum for your [[Trader|trading]] people (and in-house [[Metaphysics|metaphysicians]]) to deal with and it need not trouble we [[Legal Eagles|eagles of the law]]. For our purposes, the trading and risk people need to come up with {{isdaprov|Close-out Amount}}s for all outstanding {{{{{1}}}|Transaction}}s. Once they have done that you are ready for your Section {{{{{1}}}|6(e)}} notice.
+There is a bit of a [[chicken licken]]-and-egg situation here as you can’t really work out their [[mark-to-market]] values for that date at any time ''before'' that date, unless you are able to see into the future or something. Anyway, that’s a conundrum for your [[Trader|trading]] people (and in-house [[Metaphysics|metaphysicians]]) to deal with and it need not trouble we [[Legal Eagles|eagles of the law]]. For our purposes, the trading and risk people need to come up with {{{{{1}}}|Close-out Amount}}s for all outstanding {{{{{1}}}|Transaction}}s.  These are intended to be determined as of the Early Termination Date, that you designated before, and which is within 20 days of the date you sent your termination notice, but note:
+{{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]]''.}}
+'''This is very important'''. This means you don’t have to liquidate a portfolio in its entirety within 20 days, or even take the values as of that {{{{{1}}}|Early Termination Date}}. If you can, you should — but it may well not be commercially reasonable — or even possible — to. The [[Lehman]] insolvency took ''months'' to unwind. Note also that [[commercial reasonableness]] is viewed from the Non-Affected Party’s perspective. It is not a licence to do whatever the hell you want — but the court won’t second guess prudent application of your own models.
+Once they have done that you are ready for your Section {{{{{1}}}|6(e)}} notice.
 ====6. Calculate and notify====