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====Flawed Assets==== | |||
{{quote| | {{quote| | ||
{{d|Flawed asset|/flɔːd ˈæsɛt/|n}} | {{d|Flawed asset|/flɔːd ˈæsɛt/|n}} | ||
A “[[ | A financial asset that looks good, but thanks to a carefully buried [[conditions precedent]], is not there when you, and more importantly, your insolvency administrator, wants it.}} | ||
{{drop|I|n the language}} of financial obligations, one’s rights to future payments under a contract are an asset. You own them and, all other things being equal, can therefore ''deal'' with them — that is, sell or raise money against them — the same way you can sell or mortgage a house, car, a portfolio of equities, or some [[Bitcoin|decentralised cryptographic tokens representing abstract capital]]. ''[Really? — Ed.]'' | |||
“Assets” have a few “[[ontological]]” properties, one of which is ''continuity'', in time and space. Assets might rust, depreciate, go out of fashion or stop working properly but they are nevertheless, existentially, still ''there'', at least until you do sell them. They therefore have some value to you, however parlous the state of your affairs might otherwise be. | |||
This makes accounting for assets possible, albeit difficult. Should the fates line up for you such that someone is drawing up a closing account of your earthly financial existence — should you become ''[[Insolvency|bankrupt]]'', heaven forfend — your assets can reliability be popped onto the “plus” side of the ledger. The difficulty subsists in working out what they are worth, but at least they are there. | |||
This essence of continuity is important to the administration of failing enterprises wherever they are based, and so many countries have rules preventing company managers disposing of their assets in the shadows of impending disaster. You can’t therefore grant unfair preferences, by selling or giving away your assets at an undervalue. And you can’t enter contracts, even in times of fair weather, which might have the effect of giving your creditors and counterparties unfair preferences, should the clouds roll in. | |||
====Insolvency regimes and Section 2(a)(iii)==== | |||
{{drop|I|n the United}} States, there is a provision in the [[Bankruptcy Code]] rendering unenforceable any term in a contract that provides for its termination or modification solely because of a provision in such contract or lease that is triggered by insolvency proceedings. These are known by Americans as “[[ipso facto]]” clauses, because the simple ''fact'' of bankruptcy “in itself” triggers the clause. If Section {{{{{1}}}|2(a)(iii)}} is an ipso facto clause, then it would not be enforceable. | |||
So an asset that doesn’t have that quality of continuity: that suddenly isn’t there, or that has the unnerving quality of winking in and out of existence at inopportune moments — especially at times of its owner’s existence fitfulness — is somehow imperfect: “flawed”. | |||
Section 2(a)(iii) has exactly that effect on a Defaulting Party’s claims under an ISDA. Just when it goes insolvent or fails materially to perform, its “asset” represented by the Transaction, perhaps temporarily, vanishes. It makes the ISDA a “flawed asset” because allows a Non-defaulting Party to indefinitely suspend its performance of its obligations under a Transaction without terminating the Transaction if its counterparty defaults. Should the Defaulting Party cure the default, the Transaction resumes and the Non-defaulting Party must resume all its obligations, including the suspended ones. But for so long as the default is not cured, the Non-defaulting Party does not have to do anything but keeps the option to terminate (thereby crystallising the loss at any time. | |||
But it doesn’t have to. | |||
====Rationale: avoiding a cleft stick==== | ====Rationale: avoiding a cleft stick==== | ||