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Template:Isda 2(a)(iii) summ: Difference between revisions
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====The problem with bilateral agreements==== | |||
As we have remarked before, most financing contracts are decidedly one-sided. One party — the dealer, broker, bank: we lump these various financial service providers together as ''The Man'' — provides services, lends money, creates risk outcomes; the other — the customer — consumes them. Generally, the customer presents risks to The Man and not vice versa. All the weaponry is therefore pointed in one direction: the customer’s. It almost goes without saying that should the customer “run out of road”, the Man stands to ''lose'' something. | |||
Even though the ISDA is also, in practice, a “risk creation contract” having these same characteristics, it is not, in theory, designed like one. Seeing the dealer and the customer for what they are involves seeing a rather bigger picture. In the small picture — the ISDA agreement proper — either party can be out of the money, and either party can blow up. The weaponry points both ways. | |||
This presented the First Men with an unusual scenario when they were designing the {{isdama}}: what happens if ''you'' blow up when ''I'' owe money to you? Here I might not want to crystalise my contract: since it will involve me paying you a mark-to-market amount I hadn’t budgeted for I might not even be able to. (This is less of a concern in these days of mandatory bilateral variation margin, but the {{isdama}} was forged well before this modern era). | |||
The answer the [[First Men]] came up with was the “flawed asset” provision of Section {{{{{1}}}|2(a)(iii)}}. There is an argument it wasn’t a good idea then; there is a better argument it isn’t a good idea now, but like so many parts of this sacred form it is there and, for hundreds and thousands of ISDA trading arrangements, we are stuck with it. | |||
====Flawed assets generally==== | ====Flawed assets generally==== | ||
{{Flawed asset capsule|{{{1}}}}} | {{Flawed asset capsule|{{{1}}}}} | ||