Template:Isda 5(a)(iii) general: Difference between revisions

For paranoia junkies and conspiracy theorists amongst you, note the long reach this event of default gives to a {{isdaprov|Cross Default}} provision. Now, granted, in the ordinary course {{isdaprov|Cross Default}} keys off [[borrowed money]] or [[indebtedness]], and by common convention that does not count [[out-of-the-money]] exposures under derivative contracts, so the {{isdama}}’s own events of default should not exacerbate your cross-default risk under other contracts. Unless you widen {{isdaprov|Specified Indebtedness}} to include derivative exposures, as some counterparties do.

Now we see that courtesy of Section {{isdaprov|5(a)(iii)}}, a default by a counterparty’s {{isdaprov|Credit Support Provider}}, which need not be a parent: it may be an unaffiliated third-party like a bank writing a [[letter of credit]] or financial [[guarantee]] may be default under the {{isdama}} for the counterparty, even where the counterparty itself is fully [[Solvency|solvent]], in [[good standing]], of sound credit and up-to-date with its rent, outgoings, credit card payments and so on. Fair enough, you might say, for that credit support was a fundamental part of the counterparty’s calculus when agreeing to trade swaps in the first place, and so it was — but the same event could be used by your other lenders or counterparties under different facilities, even ones ''not'' guaranteed by the same [[guarantor]].