Monday 09 September 2013

Excuses and obstacles in negotiation: Part 1


ISDA negotiation obstaclesISDA Master Agreement negotiations can be difficult and lengthy and traders can wring their hands in frustration and disbelief as profitable trading opportunities dissolve while the negotiation process meanders on.

Successful negotiation of ISDA Master Agreements is critical because nowadays many banks will not allow traders to deal with a large range of counterparties unless an Agreement and often a Credit Support Annex has been signed first.

ISDA negotiations are difficult for several reasons viz:

  • The documentation is complex.
  • Credit risk is always a major concern.
  • Legal issues can be troublesomely uncertain.
  • Most negotiation teams are few in number.

These factors underlie many of the most common excuses that delay ISDA negotiations.

Negotiating through and around excuses and obstacles often needs the skill of a professional poker or chess player. The problem with any of these excuses is working out just how serious your counterparty’s negotiator is about them.

The excuses and obstacles I want to look at in these two articles are:

  • Your provision is not market standard.
  • That will have to be approved by Head Office.
  • We have never amended that provision before.
  • Make them guess.
  • Take it or leave it.
  • The sound of silence. 

Let us examine the first three of these in this article.

Your provision is not market standard

How often have I heard this one!

A counterparty may reject unusual or unwanted provisions because he/she considers they are not market standard. While there is no law that everything has to be market standard, it does shift the burden of justifying the provision back to you. It can also provide an effective excuse for your counterparty to his/her boss or traders that lack of progress in the negotiation is due to you proposing off market provisions.

This can be difficult to counter. First, your counterparty’s negotiator may not have enough experience to know what is truly market standard. They may honestly believe that what you are proposing is not normal. Second, they may simply not understand the provision and that requires you to educate them. Third, the provision may not be market standard in one area, but may be market standard in others which adds to the confusion. For instance, in a 1992 Agreement Schedule it would not be market standard to have Market Quotation as the payment measure for FX Transactions or Currency Options (Loss is the norm in those markets) but it would be normal to apply Market Quotation to other plain vanilla OTC derivative transactions.

However, if you are sure of your ground with a non market standard provision, stand up to your counterparty’s negotiator and give good reasons.

That will have to be approved by Head Office

This type of excuse is known as appealing to a higher authority.

It is effective because it is often difficult to challenge the suggestion that a particular provision or deletion requires the approval of a head office in a foreign country. This response can suggest that your counterparty has taken a firm stand against your proposal. It also implies that obtaining approval will be a time consuming and perhaps painful exercise.

For example, if your counterparty’s London Office actually has to go to its head office say in Tokyo or elsewhere for approval, then the negotiation will probably be stalled for some time. The combination of different time zones, cultures, language barriers and inertia make it difficult to overcome this particular obstacle. You may consider challenging it if the issue would not normally require special approval in your own market. However, keep your traders informed on the position. Maybe they could contact their opposites at the counterparty’s Head Office for assistance.

We have never amended that provision before

This is similar to the “not market standard” excuse. It is most effective if the counterparty can quote how many agreements it has negotiated in the past but few do or can. The implications are that obtaining such a change will be difficult, time consuming or impossible because historically the counterparty has never agreed to it. It also implies that it would be unfair for the counterparty to concede it to you when it has rejected it for others.

Even if the excuse is true, it does not mean that just because your counterparty’s position is historically consistent, that your own request is unreasonable and you should stick to your guns, at least for a while, if it is really important to you.

I know a banking group which has major banking and insurance businesses under the same umbrella. They always ask that the definition of Affiliates excludes their insurance business for the purposes of the Absence of Litigation representation because the bank does not know the extent of such litigation for its sister insurance business. Generally they achieve this but they could meet a counterparty who has never conceded it before and will not now.

In the next article we will consider the other three excuses and obstacles.

Paul Harding

© Derivatives Documentation Limited

Posted by Paul Harding

Category: ISDA negotiation

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