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Template:M summ 2002 ISDA 5(a)(vi): Difference between revisions
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Under the {{isdama}}, default by a swap counterparty on “{{isdaprov|Specified Indebtedness}}” with a third party in an amount above the “{{isdaprov|Threshold Amount}}” is an {{isdaprov|Event of Default}} under the {{isdama}} — even though the counterparty might be fully up to date with all covenants under the {{isdama}} itself. {{isdaprov|Cross Default}} thus imports the default rights from some contract the counterparty has given away to some third party random — in fact ''all'' default rights it has given away to ''any'' randoms — into your {{isdama}}. For example, if you breach a financial covenant in your [[revolving credit facility]] with some other [[bank]], an entirely different swap counterparty could close you out ''even if your bank lender didn’t''. | Under the {{isdama}}, default by a swap counterparty on “{{isdaprov|Specified Indebtedness}}” with a third party in an amount above the “{{isdaprov|Threshold Amount}}” is an {{isdaprov|Event of Default}} under the {{isdama}} — even though the counterparty might be fully up to date with all covenants under the {{isdama}} itself. {{isdaprov|Cross Default}} thus imports the default rights from some contract the counterparty has given away to some third party random — in fact ''all'' default rights it has given away to ''any'' randoms — into your {{isdama}}. For example, if you breach a financial covenant in your [[revolving credit facility]] with some other [[bank]], an entirely different swap counterparty could close you out ''even if your bank lender didn’t''. | ||
This might seem like a groovy thing until you realise that | This might seem like a groovy thing until you realise that, like most ISDA provisions, {{isdaprov|Cross Default}} is ''bilateral''. It can bite on ''you'' just as brutally as it can bite on the other guy. In the loan market, where the Cross Default concept was born, contracts are not bilateral. There is a [[lender]] and a [[borrower]], and the [[borrower]] gets ''null points'' in the cross default department against the lender. | ||
But {{isdama}} is not a lending contract. Especially not now everything is, by regulation, daily [[Variation margin|margined]] to a zero threshold. ''There is no material [[indebtedness]]''. | But {{isdama}} is not a lending contract. Especially not now everything is, by regulation, daily [[Variation margin|margined]] to a zero threshold. ''There is no material [[indebtedness]]''. | ||
So, if you are a regulated financial institution, the boon of having a {{isdaprov|Cross Default}} against your counterparty — which might not have | So, if you are a regulated financial institution, the boon of having a {{isdaprov|Cross Default}} against your counterparty — which might not have a lot of public indebtedness — may be a lot smaller than the bane of having given away a {{isdaprov|Cross Default}} against yourself. Because you have a ''ton'' of public indebtedness. | ||
{{isdaprov|Cross Default}} is, therefore, theoretically at least, a very dangerous provision. [[Financial reporting]] dudes — some more than others, in the [[JC]]’s experience — get quite worked up about it. Yet, it is very rarely triggered:<ref>That is to say, it is practically useless.</ref> It is inherently nebulous. [[Credit officer|credit officers]] disdain nebulosity and, rightly, will always prefer to act on a clean {{isdaprov|Failure to Pay}} or a {{isdaprov|Bankruptcy}}. Generally, if you have a daily-margined {{isdama}}, one of those will be along soon enough. And if it isnt’ — well, what are you worrying about? | {{isdaprov|Cross Default}} is, therefore, theoretically at least, a very dangerous provision. [[Financial reporting]] dudes — some more than others, in the [[JC]]’s experience — get quite worked up about it. Yet, it is very rarely triggered:<ref>That is to say, it is practically useless.</ref> It is inherently nebulous. [[Credit officer|credit officers]] disdain nebulosity and, rightly, will always prefer to act on a clean {{isdaprov|Failure to Pay}} or a {{isdaprov|Bankruptcy}}. Generally, if you have a daily-margined {{isdama}}, one of those will be along soon enough. And if it isnt’ — well, what are you worrying about? | ||