1. Are these terms “standard”?
The question I am being asked most often as a consultant is: “are these terms standard”? This happens to be the most popular question in respect of any trading agreement that I’m asked to review. Peer benchmarking is a very delicate endeavour in the financial services industry and needs to be handled with care and caution.
Asset managers are very protective of the terms of their ISDA templates with key broker counterparties. Equally, the brokers keep their selection of “platinum” terms (usually reserved to a handful of clients) strictly confidential. Transparency in this area is generally not well received and frowned upon, and for a good reason – not only because bilaterally agreed terms should be kept confidential, but also, if revealed inappropriately, such information could upset a very delicate balance of power between the market participants.
So, are the ISDA terms your business received “standard”? The answer is – it depends. In my view, “standard” ISDA terms are a myth. What is appropriate for one asset manager or a buy-side client, may be completely unsuitable for another, and there is very little point in comparing apples and pears (albeit they’re both fruit). This is why ISDAs are negotiated and were designed for customisation to fit different client profiles.
Nonetheless, there are some themes and trends, certain concepts and provisions under ISDA, which are suitable for comparison purposes; for example, the key components of the NAV triggers, Calculation Agent language or the use and drafting of Additional Termination Events.
To sum-up, peer benchmarking, if done correctly, bearing in mind the strategy, the size and legal structure of the trading entity and the bargaining powers of the parties involved, can be quite an exciting and revealing exercise! Most importantly, it can mean that your business is offered most appropriate and not “off the shelf” ISDA terms.
2. This is all great, but do we really need to negotiate the terms?
If I had a penny every time this question is asked! The answer is really in what you prefer – McDonald’s or a home-made cooked meal? Of course, there may be occasions when we only have just about enough time to order a Big Mac, but it’s all about the quality of ingredients, the experience you wish to deliver to your clients and the aftertaste.
Although the industry is gearing towards full automation, I will always advocate for some level of customisation, and not because it’s good business for the lawyers, but because it’s the right thing to do (remember Lehman if in doubt). If you’re interested in exploring this topic further, I discussed my top reasons to negotiate ISDAs in this blog.
3. How long is this negotiation going to take?
When I worked as an in-house legal counsel at Credit Suisse, the question “ Can we trade yet?” would come up at least three times a day. Although sometimes the ISDA deals can indeed be urgent, most of the time they are not. Both parties have to be realistic – negotiating a brand new ISDA can take anything from a month up to years!
The key points to consider in order to answer this question is whether or not you have a working relationship with the counterparty, a good template in place and what is the overall business appetite?
If you’re a buy-side client, you either have your own pre-agreed negotiated template or you will receive one “off the shelf” from your broker counterparty. If you’re on the sell-side, you will have a selection of templates to choose from and elections to make before sending it to your buy-side client. Sticking to the pre-agreed template means avoiding unnecessary delays and quicker time to market. In any event, you should be prepared for a minimum of four weeks of negotiations from the moment the initial drafts are issued.
If you have a question about this blog or any topic discussed on this website, please feel free to email me at hello@derivativescourses.com
Best regards
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