Template:M summ 2018 CSD 13(h): Difference between revisions

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===The basic problem part II===
===The basic problem part II===
Now remember: unlike [[variation margin]], where only the [[in-the-money]] counterparty holds it, there are necessarily ''two'' bucket of [[Regulatory IM]] at all times: the stuff ''you'' have posted as security for [[mark-to-market]] moves against ''you'', and the stuff ''the other guy'' has posted as mark-to-market movements against ''her''.
Now remember: unlike [[variation margin]], where only the [[in-the-money]] counterparty holds it, there are necessarily ''two'' buckets of [[Regulatory IM]] at all times: the stuff ''you'' posted as security for [[mark-to-market]] moves against ''you'', and the stuff ''the other guy'' posted as [[mark-to-market]] movements against ''her''.


Now: if a catastrophic event affects one party that preceipittates a close-out, there will be a winner and a loser — only one of each — but ''it does not follow that the {{isdaprov|Unaffected Party}} will be the winner''. Its portfolio may be [[out-of-the-money]]. Until the final {{isdaprov|Early Termination Amount}} is known — and this can take a while — it ''should not'' get its {{imcsdprov|Initial Margin}} back, and nor should it get to take the Affected Party’s {{imcsdprov|Initial Margin}}.
Now: if a catastrophic event affects one party that precipitates a close-out, ''you stop exchanging [[variation margin]]''. There’s no point: one side ''can’t'' pay it, [[QED|Q.E.D.]]; the other side would be ''mad'' to pay it (and thanks to Section {{isdaprov|2(a)(iii)}}, doesn’t have to in any case).  


===What were they ''trying'' to achieve? go figure.===
At the last point that the parties exchanged [[VM]], the net [[mark-to-market]] of the whole portfolio was (more or less) nil. After that point, until all {{isdaprov|Transaction}}s are terminated, the MTM value of the portfolio will swing around. It could go ''either'' way. ''It does not follow that the {{isdaprov|Unaffected Party}} will be owed any money''. By the time it has determined the {{isdaprov|Early Termination Amount}}, it may ''owe'' the defaulting party money. Until then it doesn’t need its own [[initial margin]] back, it ''should not'' get its initial margin back, and nor should it get to take the {{isdaprov|Affected Party}}’s [[initial margin]].
God only knows what they thought they were ''trying'' to achieve. Whatever remote objective they had as a goal, and whatever contingencies were dogging [[the ’squad]]’s fevered subconscious as they trudged, in formation, through the moist, dengue-infested swamps of of this drafting exercise — and there is some talk that there may have been skirmishes with pockets of rogue [[Buyside counsel|buy-side advisors]] to distract them as they went waded through the hip-high sludge —  what is left to posterity is a confused, gibbering disaster.


===What did they ''need'' to achieve? Straightforward===
This is just my opinion.
All this provision does is describe ''when'' a {{imcsdprov|Secured Party}} can actually take the [[initial margin]] the {{imcsdprov|Custodian (IM)}} is holding for it.  


You should not be surprised to hear this should be, more or less, ''when the {{imcsdprov|Chargor}} has actually defaulted and been closed out'' — and, really, the control of secured collateral held under {{imcsdprov|Control Agreement}} would ordinarily be most suitably dealt ''by that {{imcsdprov|Control Agreement}}''. The clue, surely, is in the name?
===What was {{icds}} ''trying'' to achieve?===
So this brings us to the abomination we find on the page before us. God only ''knows'' what {{icds}} ''thought'' they were ''trying'' to achieve. Whatever remote objective they had as a goal, and whatever contingencies were dogging [[the ’squad]]’s fevered subconscious as they trudged, in formation, through the moist, dengue-infested swamps of of this drafting exercise — and there is some talk that there may have been skirmishes with pockets of rogue [[Buyside counsel|buy-side advisors]] to distract them as they went waded through hip-high sludge —  what is left to posterity is a confused, gibbering disaster.


Until the {{isdama}} has been fully closed out and the {{isdaprov|Early Termination Amount}} — that is, the total amount due following termination and valuation of all {{isdaprov|Transaction}}s following the default —  determined, you don’t definitively know what you are owed — even ''if'' you are owed anything: only one party to an {{isdama}} can be owed something, remember — so until then, what business have you got appropriating the {{imcsdprov|Initial Margin}}? Nor do you have any credit risk over it: it is held at a third party and [[secured]] in your favour. ''Cool your jets''.
===What did they ''need'' to achieve? Straightforward.===
All this provision does is describe ''when'' a {{imcsdprov|Secured Party}} can actually take the [[initial margin]] the {{imcsdprov|Custodian (IM)}} is holding for it — the return of its own [[initial margin]], and the stuff the other guy has posted, assuming the other guy is the one who, at the end of the day, owes the money.


But that event by our read, a “Failure to Pay Early Termination Amount” — isn’t even the default value for a {{imcsdprov|Secured Party Rights Event}}: rather, it is one of a tangled menu of alternatives.
You should not be surprised to hear this should be, more or less, ''when the {{imcsdprov|Chargor}} has actually defaulted and been closed out, the Early Termination Amount calculated, been found to be owed by the {{imcsdprov|Chargor}}, and the {{imcsdprov|Chargor}} having failed to pay it '' — and, really, the control of secured collateral held subject to a “{{imcsdprov|Control Agreement}}” would ordinarily be most suitably dealt ''by that {{imcsdprov|Control Agreement}}''. The clue, surely, is in the name? Well, the {{imcsd}} does its own job or determining when this would be it does a ''horrible'' job of it, truth be told, but it is a job — so (anecdotally) the market-standard {{imcsdprov|Control Agreement}}s all tend to defer to the {{imcsdprov|Secured Party Rights Event}} as determined under the {{imcsd}}. So here we are.
 
===What ''did'' they achieve?===
An unholy mess.  The starting point —  crafted by [[sell-side]]-influenced squad{{tm}}, endeavours to match the ''regulatory'' margin regime as closely as possible to the broker-imposed ''contractual'' initial margin regime.  But — and say what you like about the wisdom of regulation-enforced bilateral initial margin — bilateral, regulation enforced initial margin is a different prospect altogether. We suppose the squad may have been in some denial about this, and the worldwide community of regulators may have been in some denial that the sell-side would be in denial about it, too.  But for the record, here are the differences:
# '''It is bilateral''': Contractual margin tends not to be: the brokers require their customers to provide it. The customers don’t ask for it from brokers.
# '''It is [[title transfer]]''':<ref>Or there is a wide-ranging right of [[reuse]], which makes it ''effectively'' title transfer.</ref> Therefore, whoever holds initial margin generally has it, to use as it sees fit, at all times. Where initial margin is posted away to a third party custodian with expressly ''no'' right of reuse, things are different.
# '''It is held in [[safekeeping]] by a third party''': Again, if you don’t hold the margin, you can’t reuse it, are not meant to be able raise funds against it, it does not secure present [[indebtedness]],<ref>Okay, this is true of all initial margin. But where you don’t even hold it, there should not be the temptation, you know?</ref> it is there purely as a credit default mitigant.
 
That starting point, therefore — “an {{isdaprov|Early Termination Date}} in respect of all {{isdaprov|Transaction}}s has occurred or been designated as the result of an {{isdaprov|Event of Default}} or {{imcsdprov|Access Condition}} with respect to the {{imcsdprov|Chargor}}” — is one buy-side counsel are unlikely to like, as it allow a {{imcsdprov|Secured Party}} to spring {{imcsdprov|Posted Credit Support (IM)}} ''out'' of the {{imcsdprov|Custodian}}’s possession at an arbitrary date at which time you do not know whether you are even owed anything. You don’t even know whether you are owed anything ''on'' the {{isdaprov|Early Termination Date}} for that matter (and since it is bilateral, nor, really should [[sell-side]] [[legal eagle]]s like it, either).
 
''Or'' you can elect to let your {{imcsdprov|Control Agreement}} govern.
===What would the JC suggest?===
If you can resist the urge to fire them at ISDA’s headquarters, you can damn the torpedoes and take the [[JC]]’s recommendation, as discussed below.