82,914
edits
Template:M gen 2002 ISDA 2(a)(iii): Difference between revisions
Template:M gen 2002 ISDA 2(a)(iii) (view source)
Revision as of 08:44, 31 August 2021
, 31 August 2021→Why the regulators don’t like Section {{isdaprov|2(a)(iii)}}
Amwelladmin (talk | contribs) |
Amwelladmin (talk | contribs) |
||
| Line 4: | Line 4: | ||
An insolvent counterparty may be in a weakened moral state, but if it still made ''some'' good bets under its derivative trading arrangements, so it ought to be allowed to realise them. On the other hand, the contract has a fixed term; you wouldn’t be entitled to realise those gains early if you ''hadn’t'' gone insolvent<ref>This is true in legal theory but in most cases not in practice: usually a swap dealer will offer you a price to close out your trade early — at its side of the market, naturally — and unless you are doing something dim-witted like selling tranched [[credit protection]] to [[broker-dealer]]s under [[CDO Squared]]s they have put together themselves, you should be able to find another [[swap dealer]] to give you a price on an off-setting trade.</ref> so why should it be any different just because you’ve blown up? The answer to that is, put up or shut up: If you don’t like it that I can’t pay your margin, you are entitled to close out. If you don’t want to close out, then you can jolly well carry on performing. In any case, regulators also wonder: ''how long'' can this state of suspended animation last? Indefinitely? What is to stop a non-defaulting party monetising the gross obligations of a defaulting party not closing out, invoking {{isdaprov|2(a)(iii)}}, suspending its performance and then realising value by [[set-off]]? | An insolvent counterparty may be in a weakened moral state, but if it still made ''some'' good bets under its derivative trading arrangements, so it ought to be allowed to realise them. On the other hand, the contract has a fixed term; you wouldn’t be entitled to realise those gains early if you ''hadn’t'' gone insolvent<ref>This is true in legal theory but in most cases not in practice: usually a swap dealer will offer you a price to close out your trade early — at its side of the market, naturally — and unless you are doing something dim-witted like selling tranched [[credit protection]] to [[broker-dealer]]s under [[CDO Squared]]s they have put together themselves, you should be able to find another [[swap dealer]] to give you a price on an off-setting trade.</ref> so why should it be any different just because you’ve blown up? The answer to that is, put up or shut up: If you don’t like it that I can’t pay your margin, you are entitled to close out. If you don’t want to close out, then you can jolly well carry on performing. In any case, regulators also wonder: ''how long'' can this state of suspended animation last? Indefinitely? What is to stop a non-defaulting party monetising the gross obligations of a defaulting party not closing out, invoking {{isdaprov|2(a)(iii)}}, suspending its performance and then realising value by [[set-off]]? | ||
On the other hand, suggesting a fundamental part of the close-out circuitry of an {{isdama}} is a | On the other hand, suggesting a fundamental part of the close-out circuitry of an {{isdama}} is a “walk-away” takes prudentially regulated counterparties to an uncomfortable place with regard to their [[risk-weighted assets]] methodology. | ||
With the effluxion of time some of the heat seems to have gone out of the debate, and new policies, or market-led solutions, have taken hold. | With the effluxion of time some of the heat seems to have gone out of the debate, and new policies, or market-led solutions, have taken hold. | ||