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These qualities interact and depend on each other: agreements which are fair will need to be clear, those that are clear will inspire confidence in your own staff, which will tend them away from the [[Casanova principle]] towards fairness; an agreement that is clear and fair lends itself to consistency, since there will be less cause to negotiate and one that is fair, clear and consistent is easy to maintain and, heaven forfend, enforce.
So, what makes for a good ISDA? What makes ''any'' commercial contract good?


===Fair===
Bear in mind that a contract fulfils different purposes for different constituents during its life. For [[Sales]], it is a tool of [[persuasion]]. For [[Credit]], a long-range defensive strategy. For [[Operations]], a manual. For the [[Legal Eagles]], a ''crust''.<ref>There is an expanded riff on this for, premium subscribers, [https://jollycontrarian.com/secure/index.php?title=Purpose '''here'''].</ref>
{{Quote|“There could be no negotiating with terrorists.
:—Attributed to Richard Nixon}}
{{Drop|[[Qualities of a good ISDA|F]]|airness as an}} abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in that [[alternative dispute resolution]] module but is sure to ship a haymaker to the jaw on first contact with the real commercial world. We are enculturated to treat a negotiation as some kind of trench warfare: as if we are facing our mortal enemy and not our customer. It is true that our customers are similarly disposed, fairness never gets a chance to break out.


But this is no [[single round prisoner’s dilemma]]. To show fairness is not to show weakness, but ''strength''.
Crystalline legal exactitude is but one quality and, in most cases an oddly insignificant one in that, once a contract is signed, the overwhelming likelihood is that ''no-one will ever look at it again''. Not even Ops, once they have punched the collateral eligibility criteria into their systems.


JC is by lifelong experience a [[sell-side]] guy: he comes at this from the perspective of a merchant contracting with its customers. Hip types call these “B2C” deals, but the JC is not a hip type. Merchant and customer are, generally, on the same side: their interests conflict but gently, and not viciously: the merchant wants a [[commission]] or a markup, the customer wants the product cheap, but beyond that we each wish earnestly for each other’s continued prosperity. Things can get chewy at the extremes, but most customers never get near a [[tail event|chewy extreme]].
The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to ''avoid'' controversy — it goes without saying “[[the sacred fourteen]]” are already immaculate: we mean, of course, “what makes a good ISDA ''{{isdaprov|Schedule}}''”. For it will be toiling over that grubby mortal [[appendix]] — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a [[negotiator]] will live out her days.<Ref>What is the difference between [[appendix|a schedule, an appendix and an annex]]?</ref>


Now sell-siders may occasionally engage with ostensible hostiles — competitors for example — but when they do, they abide by an unspoken pact of [[good faith]] for the limited ends which have brought the warring sides together. They must, at some level, trust one other or at least have a common interest, or they would not contract at all.  
It should have five basic qualities:  ''fairness'', ''confidence'', ''clarity'', ''consistency'' and ''simplicity''. These qualities interact with and, in large part, depend on each other.


We don’t negotiate with terrorists.
''Fair'' agreements must be ''clear'' for customers to realise they are fair.  


In any case, the “merchant-to-customer” contract is, by a landslide, the most common kind. Those with any in-house experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, when there isn’t — ''the business will roll over''. No-one takes a point with a solvent client.
''Clear'' agreements will inspire ''confidence'', in your own staff, thus distracting them from the temptations of [[Casanova principle|Casanova’s principle]] and toward ''fairness''.  


This is nothing more than common sense: you stand far more to gain in future revenue by preserving your relationship at the small cost of excusing a customer the occasional gaffe than taking a literal stance on technical errors.
''Clarity'' and ''fairness'' lend themselves also to ''consistency'' since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object.  


The instinct to let it go is so pronounced that compliance teams have contrived means to prevent these waivers for fear they are impermissible “inducements”. Were it not for the deeply embedded [[agency problem]] inside most organisations by dint of which they could well be, this would be absurd.
''Clarity'', ''fairness'', ''confidence'' and ''consistency'' make for ''simplicity'': a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce.


In any case, the [[commercial imperative]] is so overwhelming an factor in the post-contract business relationship that there is little point in starting with, let alone achieving, terms that go beyond fair. ''No-one will ever use them''. Seeing as, all other things being equal a you will complete a fair contract faster than you will an unfair one, and seeing as [[the ideal negotiation is no negotiation|the ideal negotiation is ''no'' negotiation]] — you should start with a fair template.
===Fairness===
 
{{Quote|“There could be no negotiating with terrorists.”
===Confident===
:—Attributed to Richard Nixon}}
{{Drop|Y|our form should}} inspire confidence in your negotiation team. They should feel comfortable with it, they should ''understand'' it, they should understand the product it governs, and you should encourage them to go beyond its formal articulation and understand the underlying commercial drivers of the relationship. If they do, it will make plain the parts of the contract that aren’t achieving what they seem to be.
{{Drop|[[Qualities of a good ISDA|F]]|airness as an}} abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in [[alternative dispute resolution]] class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal [[negotiation]] as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so ''fairness'' never gets a chance to break out.
 
A negotiation team that is fearful of its material will hide behind formal rules. They won’t be drawn to discuss it — if they don’t understand it, why would they put that vulnerability on show? — so will resort to the usual electronic trench warfare of long, bulleted issues listed that pass tediously between negotiation counterparties and within organisations as they go through their motions of escalating and clearing issues.
 
Reverence to and intimidation by your own contractual form is madness, of course: we should not be surprised, in our [[High modernism|high modernist]] times, that we fetishise the [[Substance and form|form over the substance]]  — but deference to a contractual form that is plainly suboptimal — which doesn’t meet our saintly criteria — is no cause for celebration. A confident negotiating team ''engages'' with the form rather than deferring to it. This is the negotiator’s version of “[[jidoka]]”: the human touch that makes the machine sing.
 
=== Clear ===
 
{{Drop|[[Qualities of a good ISDA|O]]|f the many}} [[The purpose of an ISDA|purposes of the ISDA]], most deal with the present (such as desired capital treatment; the availability of close-out [[Close-out netting|netting]]) and the past (representations and warranties, and [[Section 2(a)(iii) - ISDA Provision|conditions precedent to transacting and continuing to perform]]), but only one deals with the future. The credit terms: in what circumstance can I break the glass, sound the alarm and head for the lifeboats.
 
These will only come into serious contemplation at times of extreme stress: the market’s, your management’s and, therefore, ''yours''. The more the firm stands to lose, the more extreme those stressy circumstances are likely to be. Your management will be going mad — make no bones about that — but so will the market and, quite possibly, the geopolitical situation too. All kinds of people will be doing inexplicable things.
 
Your customers will be AWOL: the defaulting client certainly will. Bank chief executives won’t take each other’s calls. Prime Ministers will be ordering overseas embassies to max out their credit cards just to have cash on hand to meet the government’s obligations.<ref>This happened in New Zealand in 1981. [[Wage and price freeze|True story]]. </ref> Central bankers will be ordering the banks they regulate to lowball [[London Inter Bank Offered Rate|LIBOR]].<ref>Controversial, I know, but this seems increasingly likely to have been the case.</ref>
 
We do not imagine that, when they crafted its close-out mechanics, the ’squad had the wider general ''ambiance'' in which the ISDA’s s last-resort rights would be exercised. They ''can’t'' have. We imagine they pictured the close-out urge coming upon the responsible credit officer, in isolation, at a time of beatific placidity: that there would be time and space to consider and quietly contemplate what must be done, perhaps with a frisson of regret for the poor customer whom one is letting down.
 
''It will not be like that.''
 
There will be multiple counterparty failures at once. All kinds of things will be stretching your attention, and your management’s. There will be allegations — unproven, unverifiable, and likely false ''but at the time you won’t know it'' — of fraud, of dastardly dealing, of internecine conflicts within the client, of side-conversations with your CEO who is allegedly related to the chief investment officer by marriage, of predatory competitors beating you to the close-out punch and eating your lunch. All of this is the fog of war.
 
Even among those who had them in the first place, patience and a sense of humour will be in short supply. People — many, ''many'' people — will want short, clipped answers to different questions they are all shouting at you at once — ''to which there are no short, clipped answers''. If you even understand the question, the last thing anyone wants to hear by way of answer is, “ahhh, it’s ''complicated''” or, God forbid, “the contract is not clear.”
 
And bet your bottom dollar, it will ''not'' be clear.
 
This, counsels, we think — and we are obliged to say the JC seems to be on his own about this one — short, clear, plain, ''blunt'' termination language, with simple-to-follow events addressing only generally catastrophic circumstances. The day is going to be an omnishambles, so make your job on that day as easy as it can possibly be.
 
The reality is that most of the weapons you need are embedded in the pre-printed form of the ISDA master agreement itself. Do not mess around with these, try to resist the temptation to unnecessarily augment them, and have ready-at-hand a simple step-by-step guide to how to get through them without screwing anything up. Like [[Closing out an ISDA|this one]].
 
=== Consistent ===
{{Drop|I|t helps with}} clarity if you have confidence in a scrape that you know what you're ISDA is going to say where it matters.  You can be sure of this if you are rigourous about quality control where it matters. (Where it doesn’t — acquiescing to a counterparty’s required modern slavery representation or agreeing to the ethical treatment of the environment etc, you can afford to take a view)


“How, JC, are we supposed to force a counterparty to take our credit terms? No-one in their right mind would do that! We have to negotiate every time! And plus, we can’t stop our counterparties insisting on bespoke terms, you know: this is a client service business! We cannot dictate!”
This is, in theory, odd. After all, between good-faith traders in the marketplace, commercial negotiation is no [[single round prisoner’s dilemma]]. To show fairness is not to show weakness, but ''strength''.


Quite so: and we commend [[serenity’s prayer]] to you.  
So why the hostility? Puzzles like this often boil down to variations of the [[agency problem]]. They can usually be untangled by asking, ''[[cui bono]]''? Usually, we will find a well-meaning professional adviser “making herself useful” by “[[for the avoidance of doubt|avoiding doubt]]”. This is no exception.  


There are things you ''can'' change — your own docs — and things you may not be able to: the customer’s pet peeves.  
JC is, by lifelong experience, a [[sell-side]] guy: his clients are ''providers'' of financial services who contract with people who ''want'' them. Merchant and customer are, here as in any marketplace, generally aligned: at the limit, their interests conflict, but gently: the merchant wants a big [[commission]], the customer wants to pay a little one, but beyond that, each wishes earnestly for the other’s continued prosperity.  


====== Your forms ======
Things ''can'' get chewy at the extremes when large sums of money are involved — but most dealers and most customers never get near a [[tail event|chewy extreme]].
if you start off with something you know to be unacceptable to your customers do not be surprised when they do not accept it stop therefore, rebase your documents to be at least in concept of all from the off. There is a false economy or at any rate a misalignment in believing that your premium clients should be offered better terms then your regular ones. Your premium customers take greater risk and present greater catastrophe.. on a greater scale stop if you are prepared to run this risk with the premium customer then you should be prepared to run it with a smaller custom or two. This will also reduce the time you spend fruitlessly negotiating with customers who you know be generating less of your revenue.


Nor does de-escalating your starting position we can your hand in the negotiation. Your walk away remains your walk away Colin the sooner you get to it the better that it's does not take long tends to focus our customers mind even one a customed to long and rewarding negotiations.
We occasionally engage directly with ostensible ''hostiles'' — competitors, for example — but even then, we do so under an unspoken pact of [[good faith]] for the limited ends which have brought us together. We must, at some level, trust those with whom we contract, even if they are rivals. We must have some common interest. If we did not, we would not contract at all. {{maxim|No-one enters a contract she expects her counterparty to break}}.


Furthermore if you are diligent and consistent in your positioning, customers and their advisors will quickly tyre of banging their heads against a brick wall and will accept what is, after all, a reasonable position.
Sidenote: the late [[David Graeber]] made a fascinating point when discussing the ''non''-origin of money from [[barter]]: [[barter]] is an arm’s length trade of equivalent goods between parties who are dispositionally ''rivals'' and not partners.
Once the exchange happens, nothing is left on the table; there is no presumption of goodwill, no expectation of further business, no obligations are undischarged. This is a [[delivery-versus-payment]] exchange between untrusting aliens. This is not needed within a community of trust. Where there is trust we need not extract a pound of flesh: there is a give and take; we let obligations lie undischarged on faith they will be performed later. Our gestures acquire a moral quality. These are the ties that bind — the imperative becomes to ''avoid'' fully discharging our dues to each other and thereby undoing those ties.  


====== Customer pet peeves ======
This is the relationship we should aspire to with our customers. We trust them to pay later — we extend ''credit''. We do them favours, they appreciate it, and reward us with social, not economic, capital in the shape of more business. Hence, says [[David Graeber|Graeber]], money emerged not from barter with strangers, but to memorialise mutual debts among friends. You don’t extend credit to your enemies.
It is true that you cannot change the negotiating position of a truculent customer, but by rebating your documents to something more agreeable you perhaps avoid painting the clients into a corner from which it will not then back down in the first place.


=== Simple ===
So, we presume [[good faith]] in any negotiation: ''some'' level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “{{plainlink|https://www.bbc.co.uk/iplayer/episode/m001w2dd/the-traitors-australia-series-2-episode-9|traitor’s dilemma}}”. This makes for good TV, but bad business.
All else being equal, make it ''simple''. This is somewhat conditional, by serenity's prayer, your counterparty night have a ten for its own convoluted terms, and it takes advanced Dale Carnegie diplomacy to persuade such a chap not to self-harm — but at the least do not be the progenitor of unnecessary complication. Convolution causes confusion, confusion leads to explanation, explanation leads eventually to resolution, but that resolution takes time, burns resources, and comes at the cost of formal  or even substantive variance from your standard.  


Having to explain something that should have been clear in the first place is, at the least wasted energy.
The “merchant-to-customer” contract is, by a landslide, the most common kind. Once signed, these are filed somewhere and never again reviewed — it is bad form to pay too much attention to the letter of a deal, even should there later be an argument.<ref>{{maxim|if you have to go to the contract, you’ve already lost}}.</ref>


Use plain language. Short sentences, modern language. Write agreeably: “must” instead of “shall be obligated to —”; “may” instead of “shall be entitled but, for the avoidance of doubt, not obliged to —”.
[[Inhouse counsel]] with experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, even when there isn’t — ''the business will roll over''. No-one takes a point with a [[Insolvency|solvent]] client.


But simple aids easy comprehension at the time when things are going to hell.
This is no more than [[commercial imperative|commercial common sense]]: you stand to gain far more by preserving your relationship, even where that means excusing a customer the occasional gaffe, and ''trading'' on it than you do by taking a literal stance on technical indiscretions. That is ''[[barter]]'' behaviour.


It is defiantly standard, to the point where some will amend the schedule by reference to the line numbers in the pre-printed standard. (Don't do this: there are reformatted versions floating around with different pagination and it makes for confusion when your ISDA is scanned as text into the Edgar database etc.). It has twenty one years of history, too, and is now so canonical it is hard to imagine ISDA publishing a new one.
This instinct amongst business people to “just let it go” is so pronounced, indeed, as to unnerve regulators and [[compliance]] departments, who have contrived ways to stop it, for fear it “induces” — a fancy way of saying “bribes” — clients to continue giving business.<ref>Were it not for the deeply embedded [[agency problem]] inside most organisations, by dint of which these  arrangements could well be, this would be a bit silly. As it is, it probably isn’t. There it goes: the good old [[agency problem]], again.</ref>


Almost all the tools you need are in the master. It bears repeating that, in these days of daily variation margin, it will be a rare day when your only option to close out a potentially loss making ISDA will be some bespoke Additional Termination Event like a NAV trigger or a key man provision. One more right will complete the set: a right to call for more margin. Most prime brokers have this. If you can, by close of day, engineer a failure to pay (or an infusion of cash) then your key person trigger, cross default rights, financial reports, representations and warranties are little use to you.
In any case, the [[commercial imperative]] is so overwhelming that there is little point in asking for, let alone achieving, terms in contracts that go beyond “fair”. ''You will never use them''. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — {{maxim|the ideal negotiation is no negotiation}} — it behoves you to have a fair template.


[Another argument against bilateral margin: the customer can always close out a trade: the dealer is not on risk, QED, and will always give a price to exit — the unwind price on its hedge. It is not generally a taxable event for the dealer. Dealers can’t unilaterally terminate customer positions, and even where they can — [[synthetic prime broker]]s generally have the ''right'' to — they generally won’t, without extreme provocation, ''because that would upset the customer''.
Make your templates ''fair''.

Latest revision as of 19:59, 24 February 2024

So, what makes for a good ISDA? What makes any commercial contract good?

Bear in mind that a contract fulfils different purposes for different constituents during its life. For Sales, it is a tool of persuasion. For Credit, a long-range defensive strategy. For Operations, a manual. For the Legal Eagles, a crust.[1]

Crystalline legal exactitude is but one quality and, in most cases an oddly insignificant one in that, once a contract is signed, the overwhelming likelihood is that no-one will ever look at it again. Not even Ops, once they have punched the collateral eligibility criteria into their systems.

The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to avoid controversy — it goes without saying “the sacred fourteen” are already immaculate: we mean, of course, “what makes a good ISDA Schedule”. For it will be toiling over that grubby mortal appendix — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a negotiator will live out her days.[2]

It should have five basic qualities: fairness, confidence, clarity, consistency and simplicity. These qualities interact with and, in large part, depend on each other.

Fair agreements must be clear for customers to realise they are fair.

Clear agreements will inspire confidence, in your own staff, thus distracting them from the temptations of Casanova’s principle and toward fairness.

Clarity and fairness lend themselves also to consistency since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object.

Clarity, fairness, confidence and consistency make for simplicity: a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce.

Fairness

“There could be no negotiating with terrorists.”

—Attributed to Richard Nixon

Fairness as an abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in alternative dispute resolution class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal negotiation as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so fairness never gets a chance to break out.

This is, in theory, odd. After all, between good-faith traders in the marketplace, commercial negotiation is no single round prisoner’s dilemma. To show fairness is not to show weakness, but strength.

So why the hostility? Puzzles like this often boil down to variations of the agency problem. They can usually be untangled by asking, cui bono? Usually, we will find a well-meaning professional adviser “making herself useful” by “avoiding doubt”. This is no exception.

JC is, by lifelong experience, a sell-side guy: his clients are providers of financial services who contract with people who want them. Merchant and customer are, here as in any marketplace, generally aligned: at the limit, their interests conflict, but gently: the merchant wants a big commission, the customer wants to pay a little one, but beyond that, each wishes earnestly for the other’s continued prosperity.

Things can get chewy at the extremes when large sums of money are involved — but most dealers and most customers never get near a chewy extreme.

We occasionally engage directly with ostensible hostiles — competitors, for example — but even then, we do so under an unspoken pact of good faith for the limited ends which have brought us together. We must, at some level, trust those with whom we contract, even if they are rivals. We must have some common interest. If we did not, we would not contract at all. No-one enters a contract she expects her counterparty to break.

Sidenote: the late David Graeber made a fascinating point when discussing the non-origin of money from barter: barter is an arm’s length trade of equivalent goods between parties who are dispositionally rivals and not partners. Once the exchange happens, nothing is left on the table; there is no presumption of goodwill, no expectation of further business, no obligations are undischarged. This is a delivery-versus-payment exchange between untrusting aliens. This is not needed within a community of trust. Where there is trust we need not extract a pound of flesh: there is a give and take; we let obligations lie undischarged on faith they will be performed later. Our gestures acquire a moral quality. These are the ties that bind — the imperative becomes to avoid fully discharging our dues to each other and thereby undoing those ties.

This is the relationship we should aspire to with our customers. We trust them to pay later — we extend credit. We do them favours, they appreciate it, and reward us with social, not economic, capital in the shape of more business. Hence, says Graeber, money emerged not from barter with strangers, but to memorialise mutual debts among friends. You don’t extend credit to your enemies.

So, we presume good faith in any negotiation: some level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “traitor’s dilemma”. This makes for good TV, but bad business.

The “merchant-to-customer” contract is, by a landslide, the most common kind. Once signed, these are filed somewhere and never again reviewed — it is bad form to pay too much attention to the letter of a deal, even should there later be an argument.[3]

Inhouse counsel with experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, even when there isn’t — the business will roll over. No-one takes a point with a solvent client.

This is no more than commercial common sense: you stand to gain far more by preserving your relationship, even where that means excusing a customer the occasional gaffe, and trading on it than you do by taking a literal stance on technical indiscretions. That is barter behaviour.

This instinct amongst business people to “just let it go” is so pronounced, indeed, as to unnerve regulators and compliance departments, who have contrived ways to stop it, for fear it “induces” — a fancy way of saying “bribes” — clients to continue giving business.[4]

In any case, the commercial imperative is so overwhelming that there is little point in asking for, let alone achieving, terms in contracts that go beyond “fair”. You will never use them. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — the ideal negotiation is no negotiation — it behoves you to have a fair template.

Make your templates fair.

  1. There is an expanded riff on this for, premium subscribers, here.
  2. What is the difference between a schedule, an appendix and an annex?
  3. if you have to go to the contract, you’ve already lost.
  4. Were it not for the deeply embedded agency problem inside most organisations, by dint of which these arrangements could well be, this would be a bit silly. As it is, it probably isn’t. There it goes: the good old agency problem, again.