Template:Isda 2(a)(iii) summ: Difference between revisions

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 {{Flawed asset capsule|{{{1}}}}}
 ====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.
+{{Quote|
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+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, manufactures risk outcomes; the other — the customer — consumes them.
-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.
+Generally, the customer presents risks to The Man, and not vice versa. All the “fontish weaponry” is, therefore pointed in one direction: the customer’s. It goes without saying that should the customer “run out of road”, The Man stands to ''lose'' something. What is to be done should ''The Man'' run out of road is left undetermined but implicitly it is unlikely, and not expected to change anything for the customer. Whatever you owe, you will continue to owe; just to someone else.
-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).
+Even though the ISDA is also, in practice, a “risk creation contract” and has these same characteristics, it is not, in ''theory'', designed like one.
-The answer the [[First Men]] came up with was the “flawed asset” provision of Section {{{{{1}}}|2(a)(iii)}}. This allows an innocent, but out-of-the-money, party faced with its counterparty’s default not to close out the ISDA, but to just freeze its obligations, and do nothing until the situation is resolved.
+To see the “[[dealer]]" and the “[[customer]]” in their traditional roles of “The Man” and “punter”, therefore, one must absorb 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 fontish weaponry points ''both ways''.
-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.
+This presented the [[First Men]] with an unusual scenario when they were designing the {{isdama}}: what happens if ''you'' blow up when ''I'' owe you money? I might not want to crystallise my contract: since that will involve me paying you a [[mark-to-market]] replacement cost I hadn’t budgeted for paying out just now. (This is less true in these days of mandatory [[variation margin]] — that is one of JC’s main objections — 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)}}. This allows an innocent, but [[out-of-the-money]], party faced with its counterparty’s default, to not close out the ISDA, but just freeze its own obligations until the default situation is resolved.
+There is an argument the flawed asset clause wasn’t a good idea even then, but a better one that it is a bad idea now, but like so many parts of this sacred, blessed form it is there and, for hundreds and thousands of ISDA trading arrangements, we are stuck with it.
+Ask a char
 ====Does not apply to {{{{{1}}}|Termination Events}}====