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Template:M intro isda qualities of a good ISDA: Difference between revisions
Template:M intro isda qualities of a good ISDA (view source)
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The idea that negotiators might have ''insight'' borders on heretical among [[management consultant]]s, who regard them as fungible rule-following automatons whose chief point of differentiation is unit cost. This is, of course, absurd, even on total quality management terms. | The idea that negotiators might have ''insight'' borders on heretical among [[management consultant]]s, who regard them as fungible rule-following automatons whose chief point of differentiation is unit cost. This is, of course, absurd, even on total quality management terms. | ||
To put it in terms [[ | To put it in terms [[management consultant]]s night understand, this is ''[[jidoka]]'': “automation with a human touch”. | ||
A negotiator who [[fear|''fears'']] her material will hide behind the formal rules she is given to manage it. She won’t be drawn to discuss anything ''[[call, don’t email|live]]'' — if she doesn’t understand the form, why would she put her vulnerability on show? — so will hide behind her keyboard, contributing to the familiar experience of electronic trench warfare: she will lob long, bulleted issues lists over no-man’s-land and into the enemy’s advanced positions, or escalate that way internally to risk departments. When they land, her missiles — missives? — will hiss and sputter, being passed about for days, before eventually being lobbed back, appended with yet more more bullets and annotated in [[BLOCK CAPITALS]], ''ITALICS'' and fetching interjections in {{Fontcolour|#FF00D4|'''fuchsia'''}} and {{Fontcolour|#C8A2C8|'''lilac'''}}. | A negotiator who [[fear|''fears'']] her material will hide behind the formal rules she is given to manage it. She won’t be drawn to discuss anything ''[[call, don’t email|live]]'' — if she doesn’t understand the form, why would she put her vulnerability on show? — so will hide behind her keyboard, contributing to the familiar experience of electronic trench warfare: she will lob long, bulleted issues lists over no-man’s-land and into the enemy’s advanced positions, or escalate that way internally to risk departments. When they land, her missiles — missives? — will hiss and sputter, being passed about for days, before eventually being lobbed back, appended with yet more more bullets and annotated in [[BLOCK CAPITALS]], ''ITALICS'' and fetching interjections in {{Fontcolour|#FF00D4|'''fuchsia'''}} and {{Fontcolour|#C8A2C8|'''lilac'''}}. | ||
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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 [[The CEO wants this to happen|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. Some of this may be true. Much will be nonsense. You will have no means of telling. All of this is the fog of war. | 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 [[The CEO wants this to happen|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. Some of this may be true. Much will be nonsense. You will have no means of telling. All of this is the fog of war. | ||
Even among those who had them in the first place, | Even among those who had them in the first place, senses of humour will be in short supply. Many, ''many'' people, pursuing their own [[Buttocractic oath|buttocractic]] agendas, will want short, clipped and above all ''good'' answers to conflicting questions they are all shouting at you at once — questions to which there are ''no'' answers, let alone ''good'' ones. 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 | And unless your organisation is ''deeply'' committed to fairness, clarity and simplicity in its contractual relationships, its contracts 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 — a discipline in times of | This, counsels, we think — and we are obliged to say the JC seems to be on his own about this one — a discipline in times of fair weather and fecund trading conditions, to be prepared for typhoons. While there is time and capacity to do so, spend time ensuring your contracts have short, clear, plain, consistent and ''blunt'' termination language, with simple-to-follow events addressing only generally catastrophic circumstances. The day you need to enforce your rights will be an omnishambles enough without a baffling contract making it it hard to figure out what those rights are. | ||
Now: 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 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''']]. | |||
Like [[Closing out an ISDA|'''this one''']]. | |||
Make your forms ''clear'' and easy to follow in moments of existential crisis. | Make your forms ''clear'' and easy to follow in moments of existential crisis. | ||
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{{Drop|I|t helps with}} clarity if, in a scrape, you know what your ISDA will say where it matters without having to actually go and read it. This actually happened: | {{Drop|I|t helps with}} clarity if, in a scrape, you know what your ISDA will say where it matters without having to actually go and read it. This actually happened: | ||
{{quote| | {{quote| | ||
''SCENE: A COBRA committee meeting at a large investment bank in the teeth of the [[global financial crisis]]. ''<br>{{script|Head of Trading}}: I need to know our close-out rights against these fifteen Lehman entities.<br> {{script|General counsel}} ''( | ''SCENE: A COBRA committee meeting at a large investment bank in the teeth of the [[global financial crisis]]. ''<br> | ||
{{script|Head of Trading}}: I need to know our close-out rights against these fifteen [[Lehman]] entities.<br> | |||
{{script|General counsel}} ''(Looking pleased with himself)'': Certainly! We have a crack squad of our best lawyers on it. You will have an answer within forty-eight hours.<br> | |||
{{script|Head of Trading}} ''(Going white)'': What? Forty-eight ''hours''? I want it in forty-eight ''seconds''.}} | |||
At the point where you need your close-out rights, ''it is too late to start reading contracts''. Have you ever tried to read an ISDA Schedule in a hurry? | At the point where you need your close-out rights, ''it is too late to start reading contracts''. Have you ever tried to read an ISDA Schedule in a hurry, even when the world is not apparently on the brink of rapture? | ||
You might not need to read it at a time of crisis ''if you control quality where it matters''. If all your contracts are the same, and you know what they say, you would be in a dramatically better place. | |||
“This is all very well, JC, but how are we supposed to force a counterparty to take ''our'' credit terms? It is a competitive market! No-one in their right mind would do that! We must negotiate every time! And, plus, we can’t stop our counterparties from insisting on their own bespoke terms, you know: this is a client service business! We cannot dictate!” | |||
Quite so: and to get you through the live-long day we commend [[serenity’s prayer|Serenity’s Prayer]] to you. | |||
{{Quote|Lord, grant me:<br>The ''serenity'' to accept the things I cannot change <br>The ''courage'' to change the things I can, and <br>The ''wisdom'' to know the difference.}} | |||
You cannot control everything, it is true. But there are some things you ''can'': the starting point for your own docs, for one thing — and some things you certainly cannot, such as customer’s pet peeves. | |||
But pet peeves have the general quality of being ''correct'': few customers get “peeved” at {{isdaprov|Failure to Pay}} or {{isdaprov|Bankruptcy}} [[Events of Default - ISDA Provision|Events of Default]]. | |||
If you | Take these peeves seriously. Therefore. If you configure your human system be on the look out for them so you can constantly ''sand off'' rough edges when you encounter them — see “[[jidoka]]” above — then these pet peeves can serve as a kind of carborundum. | ||
A useful rhetorical, seldom posed, is: | It is a curious fact that template augmentations — scar tissue from previous wounds — tend to stick, whereas template simplifications do not. This is a cultural matter: no-one likes removing things they presume were put there for a good reason. This assumption is often ''wrong''. It is in your gift to change it. You just need to take hearts and minds with you. | ||
{{Quote|If someone presented this term to me, would ''I'' accept it?}} | |||
A useful rhetorical, seldom posed, is: {{Quote|If someone presented this term to me, would ''I'' accept it?}} | |||
If you start with something you know to be offensive do not be surprised when customers do not accept it and you have to change it. | |||
Rebase your documents to be acceptable to the person on the [[Reasonable person|Clapham omnibus]], at least ''in concept'', from the off. Legal advisors are already incentivised to seek changes as a means of demonstrating their [[legal value|value]]. Why start with a form with which any sane advisor would ''have'' to take issue? | Rebase your documents to be acceptable to the person on the [[Reasonable person|Clapham omnibus]], at least ''in concept'', from the off. Legal advisors are already incentivised to seek changes as a means of demonstrating their [[legal value|value]]. Why start with a form with which any sane advisor would ''have'' to take issue? | ||
====“Platinum plating”==== | ====“Platinum plating”==== | ||
[[Pareto triage|Pareto]] tells us a few special, “[[Platinum client|platinum]]” customers will generate outsized revenues, and the large majority will generate an acceptable, but unremarkable returns. A common gambit here is a sort of “quality triage” where the firm offers “platinum” customers more favourable terms than everyone else. Some firms even “tier” their customers, offering softer starting points for platinum customers. | |||
''This is madness''. It implies that tedious legal wrangling is a kind of punishment for mediocrity. This is to put things precisely backward: platinum customers generate that colossal revenue by taking ''more risks'' with ''more of the bank’s money''. If they blow up they will leave a much bigger crater. They are precisely the customers with whom your legal agreements should be ''strongest''. | |||
The converse is this: if your [[platinum client]] documentation is fit for the big risk-takers, | The converse is this: if your [[platinum client]] documentation is fit for managing the big risk-takers, ''then it is fit for everyone else too''. You don’t need need to tier your clients: just offer them all the better terms. The purpose of legal documentation is sometimes opaque but it is not ritualistic punishment. Offering “platinum terms” to regular customers will also reduce how much time you spend — ''[[waste]]'' — haggling with customers who present risk, and generate less revenue, in the first place. Why aggravate the onboarding process for low-risk clients? | ||
Nor does lowering your starting bid weaken your negotiating position. Brokerage is not a [[zero-sum game]]. There are no points for securing stronger risk terms than you need — | Nor does lowering your starting bid weaken your negotiating position. Brokerage is not a [[zero-sum game]]. There are no points for securing stronger risk terms than you need — that does not translate to less risk, just more negotiation — and your walk-away point remains your walk-away point however close you start to it. The sooner you get to agreement, or your walkaway point, the better. | ||
And if you are diligent, consistent and rigorous in this approach, your customers and their advisors will figure this out. They will tire of banging their heads against a brick wall for the sake of improving what is already a reasonable position. | And if you are diligent, consistent and rigorous in this approach, your customers and their advisors will figure this out. They will tire of banging their heads against a brick wall for the sake of improving what is already a reasonable position. | ||
=== Simplicity === | === Simplicity === | ||
{{Drop|A|ll else being}} equal, make it ''simple''. This, of course, depends on your counterpart: you can’t clap one-handed, and a dogged pettifogger who takes pride in convolution — there are many of these — will not be assuaged by your best | {{Drop|A|ll else being}} equal, make it ''simple''. This, of course, depends on your counterpart: you can’t clap one-handed, and a dogged pettifogger who takes pride in convolution — there are many of these — will not be assuaged by your best efforts to be brief, however noble. | ||
But [[Pragmatist’s prayer|Serenity’s Prayer]] is your friend, all the same. Sure; there are things you cannot change — bear them with good grace and a joyful heart — but just as many yet that you ''can'': you may have to live with whatever pedantry is flung back to you but do not ''court'' it by needlessly complicating what you send out. | But [[Pragmatist’s prayer|Serenity’s Prayer]] is your friend, all the same. Sure; there are things you cannot change — bear them with good grace and a joyful heart — but just as many yet that you ''can'': you may have to live with whatever pedantry is flung back to you but do not ''court'' it by needlessly complicating what you send out. | ||
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In essence: having to explain something that ''could'' have been clear in the first place, without loss of emphasis is, at least, wasted energy. | In essence: having to explain something that ''could'' have been clear in the first place, without loss of emphasis is, at least, wasted energy. | ||
Use plain language. Short sentences, modern language. Use “you must ~” rather than “Party B shall be obligated to ~” | Use plain language. Short sentences, modern language. Use “you must ~” rather than “Party B shall be obligated to ~”. Use “we may ~” rather than “Party A shall be entitled but, for the avoidance of doubt, not obliged to ~”. | ||
Write ''agreeably''. You have choices in how your institution expresses itself: these can influence the critical path of your negotiation. ''Don’t poke your customer with a [[sharpened stick]]''. Take lessons from Dale Carnegie: try to win friends and influence people. There are polite, agreeable and damnable ways of saying the same thing. | Write ''agreeably''. You have choices in how your institution expresses itself: these can influence the critical path of your negotiation. ''Don’t poke your customer with a [[sharpened stick]]''. Take lessons from Dale Carnegie: try to win friends and influence people. There are polite, agreeable and damnable ways of saying the same thing. | ||
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Compare: | Compare: | ||
{{Quote| | {{Quote|“Customer shall be obliged forthwith upon demand and from time to time unconditionally to indemnify and hold the Bank harmless, without set-off, limitation or counterclaim, in the event the Bank or any one or more of its affiliates, agents, nominees or sub-custodians, howsoever described, suffers or incurs, or determines in its absolute discretion that it is or may be likely to suffer or incur, any custom, duty, excise, taxation, stamp or withholding, levy, deduction or charge of whatsoever nature, including penalties, costs, charges and legal expenses incurred in respect thereof, with regard to or in respect of any of Customer’s assets held by or in the name of or in the custody network of the Bank in connection with this Agreement or otherwise.”}} | ||
with: | with: | ||
{{Quote|“If we incur any tax while | {{Quote|“If we incur any tax while we look after your assets for you, you must reimburse us upon request.”}} | ||
Simplicity aids comprehension when things are going to hell. | |||
Almost all the tools you need are in the | Almost all the tools you need are in the pre-printed Master Agreement. 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 loss-making ISDA will be a [[NAV trigger]] or a [[key person clause]]. | ||
===What you can do about it=== | ===What you can do about it=== | ||
{{drop|“T|his is all}} very well, JC, but ''come on''. What hope have I, a mere [[subject matter expert]], of influencing an organisation’s sacred forms? Hell will surely first freeze over.” | {{drop|“T|his is all}} very well, JC, but ''come on''. What hope have I, a mere [[subject matter expert]], of influencing an organisation’s sacred forms? Hell will surely first freeze over.” | ||
It is only a truism that {{shitmaxim|nothing is more immutable than policy}} if — ''because'' — | It is only a truism that {{shitmaxim|nothing is more immutable than policy}}if — ''because'' — no-one ever ''challenges'' it. | ||
Who should bell the cat? | |||
Who better than she who must suffer under its yoke? | |||
Pray, forgive | Pray, forgive JC’s mixed-metaphor rabble-rousing — but is not that challenge the very thing you have to offer? Is it not your ''calling''? Your destiny? Your ''superpower''? | ||
Within your gift, if only you would give it, lies the fresh air to heal the wounds and scars of historical misadventure to which those templates bear witness. And you won’t, why not? What does that then say about your life’s work? That you are but a painted ship upon a painted ocean? | Within your gift, if only you would give it, lies the fresh air to heal the wounds and scars of historical misadventure to which those templates bear gruesome witness. And if you won’t speak up, ''why'' not? What does that then say about your life’s work? That you are but a painted ship upon a painted ocean? | ||
Try it! Go on! Offer to fix your doughty verbiage! What have you got to lose? Did anyone get fired at your firm for asking reasonable questions? If they did, why are you still working there? | |||
Of course your counterparty’s negotiators will be just as institutionalised. They, too, will expect a certain form. They will fear, just as you do, stepping away from What Is Written; for departure from that which can be done without [[fear]] of blame. The [[buttocractic oath]] is a strong incentive. But ''overcome'' it! | |||
Rise up, [[subject matter expert]]s! Slip your surly bonds! | |||
A word from Mr [[Nietzsche]]: | |||
{{quote| | {{quote| | ||
“For believe me! — the secret for harvesting from existence the greatest fruitfulness and the greatest enjoyment is: to ''live dangerously''! Build your cities on the slopes of Vesuvius! Send your ships into uncharted seas! Live at war with your peers and yourselves! Be robbers and conquerors as long as you cannot be rulers and possessors, you seekers of knowledge! Soon the age will be past when you could be content to live hidden in forests like shy deer!”}} | “For believe me! — the secret for harvesting from existence the greatest fruitfulness and the greatest enjoyment is: to ''live dangerously''! Build your cities on the slopes of Vesuvius! Send your ships into uncharted seas! Live at war with your peers and yourselves! Be robbers and conquerors as long as you cannot be rulers and possessors, you seekers of knowledge! Soon the age will be past when you could be content to live hidden in forests like shy deer!”}} | ||