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| ===General===
| | {{isda 5(a)(vi) summ|isdaprov}} |
| {{isdaprov|Cross Default}} is intended to cover off the unique risks associated with ''lending money to counterparties who have also borrowed heavily from other people''. Now, if — as starry-eyed young [[credit officer]]s in the thrall of the moment like to — you apply this thinking to contractual relationships which aren’t “[[term loan]]y” in nature — that is, having long spells where one party is deeply in the hole to the other, and there is not so much as an incoming interest payment due over a period of months to trigger any acceleration — it will give you trouble. | |
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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''.
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| 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.
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| 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]]''.
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| 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.
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| {{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]]s disdain nebulosity and, rightly, will always prefer to act on a clean {{isdaprov|Failure to Pay}} or {{isdaprov|Bankruptcy}}. Generally, if you have a daily-margined {{isdama}}, one of those will be along soon enough. And if it isn’t — well, what are you worrying about?
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| “Okay, so why even ''is'' there a {{isdaprov|Cross Default}} in the {{isdama}}?” ''Great'' question. Go ask {{icds}}. The best [[JC|I]] can figure is that, when the [[Children of the Forest]] first invented the [[eye-ess-dee-aye]] back in those primordial times, back in the 1980s, swaps were new, they hadn’t really thought them through, no-one realised how the market would explode<ref>Ahhh, sometimes ''literally''.</ref> and in any case, folks back then held lots of opinions we would now regard as quaint. I mean, just look at the music they — okay, ''we''<ref>I am indebted to my good friend Mr. V.C.S., who writes to point out that some of us ''still'' listen to that kind of music. All About Eve were misunderstood geniuses I tell you.</ref> — listened to.
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| ===={{isdaprov|Specified Indebtedness}}====
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| {{isdaprov|Specified Indebtedness}} is generally any [[borrowed money|money borrowed]] from any third party (e.g. bank debt; [[deposits]], loan facilities etc.). Some parties will try to widen this: do your best to resist the temptation.
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| {{isda Threshold Amount summ|isdaprov}}
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| ===[[Cross acceleration]]===
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| For those [[noble, fearless and brave]] folk who think {{isdaprov|Cross Default}} is a bit ''gauche''; a bit passé in these enlightened times of zero-threshold [[VM CSA]]s<ref>Your correspondent is one of them; the author of that terrible [[FT book about derivatives]] is not.</ref> but can’t quite persuade their [[credit department]] to abandon {{isdaprov|Cross Default}} altogether — a day I swear is coming, even if it is not yet here — one can quickly convert a dangerous {{isdaprov|Cross Default}} clause into a less nocuous (but still ''fairly'' nocuous, if you ask me — nocuous, and yet strangely pointless) [[cross acceleration]] clause — meaning your close-out right that is only available where the lender in question has ''actually'' [[accelerated]] its {{isdaprov|Specified Indebtedness}}, not just become able to accelerate it, with some fairly simple edits, which are discussed in tedious detail [[Cross Acceleration - ISDA Provision|here]].
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