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===Technical nuts and bolts=== | |||
Leaving for a few moments when in this day and age you would ever need or even want to invoke {{{{{1}}}|2(a)(iii)}} other than in the strangest of days, let’s consider the mechanics. You will notice there ''are none''. Section {{{{{1}}}|2(a)(iii)}} just ''sits'' there, and has effect, without anyone’s particular by-or-leave. No notice is required: no-one need look out for envelopes being delivered to the physical address the firm occupied seventeen years ago when someone filled out Part IV of the schedule. Section {{{{{1}}}|2(a)(iii)}}doesn’t even say an {{{{{1}}}|Innocent Party}} is ''entitled'' to withhold payment: rather the conditions are not met and ''payment is not therefore due''. It just happens. | |||
This poses some rather intriguing questions: | |||
Firstly a conceptual one: at what point do we know — when even do ''I'' know — whether I have “suspended” my payment and not just simply ''failed'' on it? Is there a difference? The payment arrangements under a modern ISDA are a blizzard of electronic impulses, across multiple booking systems, product silos and other arrangements. The various operatives will have no idea of the status of other payments — sometimes these things fail for explainable reasons. So if, for some reason {{{{{1}}}|2(a)(iii)}} applies, the conditions precedent do not exist, but I make my payment anyway, then what? Is that a mistaken payment? Is it supported by [[consideration]]? Is there a potential claim for [[money had and received]]? | |||
What, for the purpose of close-out valuations, is the status of payments that ''were'' made, but that were not ''required'' to be made? Are these some kind of negative energy in the close-out spacetime; dark matter, a kind of inverted {{isdaprov|Unpaid Amount}}?<ref>Okay I am having a bit of fun with you here I confess.</ref> | |||
The other one is practical. In times of market dislocation all kinds of things can go wrong. People suddenly instigate to manual processes stopping and frisking money on its way out the door. For all you know ''your correspondent bank may be doing this without your knowledge''<ref>This is not nearly as unlikely as it seems: in a widespread market dislocation, or where sanctions are involved (hello Ukraine conflict!) expect everyone to be terrified of getting anything wrong. ''Everything'' will slow down.</ref> Counterparties make oral arrangements to check payments in before sending anything out — there is all klnds of paranoia, fear & loathing. It’s great. Sometimes payments — going on either direction — can get hung up, stuck, blocked, sanctioned, or — who knows? — waived, or suspended by mutual consent, or even suspended by ''implication'': let’s say the parties agree (or ''think'' they agree) to manually net settlement of payments usually made gross. | |||
It is not always certain whether payments have, in fact, been missed. This kind of uncertainty becomes most likely ''exactly at a time of stress''. What effect do these actions have? | |||
This can lead to some unfortunate surprises: the counterparty who files a notice of {{{{{1}}}|Failure to Pay or Deliver}}, only to find that, last week some clot in Collateral Ops mis-keyed a small yen payment, meaning that none of the payments it now sees as failing were even due in the first place. | |||
===...These days?=== | ===...These days?=== | ||
The overriding mischief that a [[flawed asset]] provision addresses arises when a solvent swap counterparty with a long-dated [[out-of-the-money]] portfolio, finds its counterparty has, against the run of play, gone bust. If I am in the hole to you to the tune of $50 million, but that liability isn’t due to mature for ten years, in which time it might well come right and even go positive, I don’t want to crystallise it now, at the darkest point, just because ''you'' sir have gone tits-up. | The overriding mischief that a [[flawed asset]] provision addresses arises when a solvent swap counterparty with a long-dated [[out-of-the-money]] portfolio, finds its counterparty has, against the run of play, gone bust. If I am in the hole to you to the tune of $50 million, but that liability isn’t due to mature for ten years, in which time it might well come right and even go positive, I don’t want to crystallise it now, at the darkest point, just because ''you'' sir have gone tits-up. | ||