82,891
edits
Template:Isda 2(a)(iii) summ: Difference between revisions
no edit summary
Amwelladmin (talk | contribs) No edit summary |
Amwelladmin (talk | contribs) No edit summary |
||
| Line 11: | Line 11: | ||
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. | 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. | ||
Section {{{{{1}}}|2(a)(iii)}} has exactly that effect on a {{{{{1}}}|Defaulting Party}}’s claims under an ISDA. Just when it goes insolvent or fails materially to perform, its “asset” represented by the {{{{{1}}}|Transaction}}, perhaps temporarily, vanishes. It makes the ISDA a “[[flawed asset]]” because allows a {{{{{1}}}|Non-defaulting Party}} to indefinitely suspend its performance of its obligations under a {{{{{1}}}|Transaction}} without terminating the {{{{{1}}}|Transaction}} if its counterparty defaults. Should the {{{{{1}}}|Defaulting Party}} cure the default, the {{{{{1}}}|Transaction}} resumes and the {{{{{1}}}|Non-defaulting Party}} must resume all its obligations, including the suspended ones. But for so long as the default is not cured, the {{{{{1}}}|Non-defaulting Party}} does not have to do anything but keeps the option to terminate (thereby crystallising the loss at any time. | |||
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”. | |||
====Insolvency regimes: not fans.==== | |||
{{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. | {{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. | ||
Whether Section 2(a)(iii) is indeed an [[ipso facto clause]] is a subject of vigorous but tiresome debate. For our purposes, the fact that people don’t easily agree about it is all you need to know: this makes a silly contractual provision even more cavalier. | |||
In the UK, there is no statutory equivalent of America’s [[ipso facto rule]], but hundreds of years ago resourceful common law judges “discovered” an “anti‑deprivation” rule that, in the honeyed words of Sir William Page Wood V.C., in Whitmore v Mason (1861) 2J&H 204: | |||
{{quote| | |||
“no person possessed of property can reserve that property to himself until he shall become bankrupt, and then provide that, in the event of his becoming bankrupt, it shall pass to another and not his creditors”.}} | |||
This required some wilfulness on the bankrupt’s part and not just inadvertence or lucky hap, but still: if you set out to defeat the standing bankruptcy laws do not expect easily to get away with it. | |||
It seems, at any rate, that Section {{{{{1}}}|2(a)(iii)}}, might resemble some kind of intended deprivation; merely crystallising one’s existing position and stopping it from going further down the Swanee, as one might do by closing out altogether, seems less so. | |||
Section 2(a)(iii) | Anyway: be aware: Talk of Section 2(a)(iii) attracts insolvency lawyers. That ought to be reason enough to keep schtum about it. | ||
====On avoiding a cleft stick==== | |||
{{drop|W|hat is the}} actual point of this odd condition precedent anyway? Why not just close out and be done with it? Why would any party ever want to ''not'' close out a {{{{{1}}}|Defaulting Party}}? | |||
It all comes down to ''[[moneyness]]''. | |||
The “[[The bilaterality, or not, of the ISDA|bilaterality]]” of most derivatives arrangements means that either party may, net, be “[[out of the money]]” — that is, across all outstanding transactions, it would have to ''pay'' a net sum of money if all transactions were terminated. This is a notional debt that only becomes “due” as such if you designate an {{{{{1}}}|Early Termination Date}} under the Master Agreement. So an [[out-of-the-money]] {{{{{1}}}|Non-defaulting Party}} has a good reason therefore ''not'' to close out the ISDA. Why should it have to pay out just because a {{{{{1}}}|Defaulting Party}} has failed to perform its end of the bargain? On the other hand, if it forebears from terminating against a bankrupt counterparty the {{{{{1}}}|Non-defaulting Party}} doesn’t want to have to continue stoically paying good money away to a bankrupt counterparty who isn’t reciprocating. | The “[[The bilaterality, or not, of the ISDA|bilaterality]]” of most derivatives arrangements means that either party may, net, be “[[out of the money]]” — that is, across all outstanding transactions, it would have to ''pay'' a net sum of money if all transactions were terminated. This is a notional debt that only becomes “due” as such if you designate an {{{{{1}}}|Early Termination Date}} under the Master Agreement. So an [[out-of-the-money]] {{{{{1}}}|Non-defaulting Party}} has a good reason therefore ''not'' to close out the ISDA. Why should it have to pay out just because a {{{{{1}}}|Defaulting Party}} has failed to perform its end of the bargain? On the other hand, if it forebears from terminating against a bankrupt counterparty the {{{{{1}}}|Non-defaulting Party}} doesn’t want to have to continue stoically paying good money away to a bankrupt counterparty who isn’t reciprocating. | ||