Template:M intro isda qualities of a good ISDA: Difference between revisions

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''.<ref>There is an expanded riff on this for, premium subscribers, [https://jollycontrarian.com/secure/index.php?title=Purpose '''here'''].</ref>

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 ''{{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>

 

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

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

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 “[[for the avoidance of doubt|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.  

We occasionally engage directly with ostensible ''hostiles'' — competitors, for example — but even then, when 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}}.

 

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 indebtedness among friends. You don’t extend credit to aliens.

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>  

[[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.

This is commercial common sense: you stand to gain far more in future revenue by preserving your relationship even where that means excusing a customer the occasional gaffe — demonstrating trust in your customer —than you do by taking a literal stance on technical errors. That is ''[[barter]]'' behaviour.

 

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”. ''No-one will ever 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.

{{Drop|Y|our form should}} also inspire confidence, and not ''[[fear]]'', in your own negotiating team. It is a fact of life that negotiators these days have less combat experience and expertise than they once had. To do a good, job a negotiator must be comfortable with her tools, not scared of them. She should ''understand'' her templates and the products they govern. She should go beyond the contract’s formal articulation to grasp the underlying commercial drivers of the business relationship.  

If she groks this, she can resolve most contractual points from first principles,<ref>Among [[management consultant]]s, this view borders on the heretical. Bite me.</ref> and help improve the form, identifying and fixing the parts that cause the most friction. To put this in [[Management consultant|management consulting]] terms, this is ''[[jidoka]]'' from the [[Toyota Production System]]: “automation with a human touch”.  

 

 

{{Quote|

“. . . I am the [[NAV trigger]] you pulled, my friend. You [[Waive|waived]] it not. <br>

Reverence to and intimidation by your own contractual form is madness, of course. While we should not be surprised, in our [[High modernism|high modernist]] times, that our overlords fetishise the [[Substance and form|form over substance]], ''deference'' to a contractual form that is plainly difficult or confusing is no cause for celebration. A confident negotiating team ''engages'' with the form rather than deferring to it.  

Make sure your team has ''confidence'' in your forms.

Close-out terms 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. Management will become hysterical and lose any sense of perspective, make no bones about that, but so will the rest of the market. All manner of carefully concealed character flaws will be suddenly laid bare. Pay attention to this: this is where you ''really'' get to what people are like.

Defaulting customers will be absent without official leave, responding to no communication channels at all. 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> It will be ''chaos''.