The GDSC worked on a wide variety of documentation related issues. Where appropriate, the GDSC issued formal recommendations and/or published its work. The GDSC also hosted industry-wide conferences to review its work with the broader industry, including lawyers, risk management professionals and others.
Below are brief summaries of the major GDSC projects. The projects are grouped by topic and generally listed in reverse chronological order.
The GDSC began by engaging in discussions and conducting
a review and analysis of certain industry standard agreements with a view
to harmonizing the operation of these agreements, particularly in crisis
situations. The process took into account the experiences of GDSC members
in periods of market volatility. The GDSC initially prioritized its work
by selecting the most important issues that were not being addressed consistently
in industry-developed standard documentation. The GDSC also focused on
market practices and procedures relevant to the documentation process.
IMPROVING MASTER AGREEMENT AND RELATED TRADING AGREEMENT NEGOTIATIONS - Part II
The GDSC had published "How to Improve Master Agreement and Related Trading Agreement Negotiations - A Practitioner's Best Practice Guide" in October 2004, which focused on the procedural aspects of master agreement negotiations, with the goal of reducing the time frames required to finalize negotiations. In 2006, the GDSC undertook a review of certain substantive master agreement provisions that can dramatically impede negotiations, generally between dealers and end-users (primarily hedge funds). The GDSC focused specifically on valuation methodologies used upon termination; termination events and events of default; and dispute resolution mechanisms. These issues, and the differences in approach between end-users and dealers, were discussed at a conference in November of that year. While complete consensus remains an aspiration, the GDSC isolated some common approaches and alternate solutions to commonly-encountered negotiation roadblocks. In this fashion, the GDSC hoped to expedite negotiations while continuing to recognize substantive differences in what various market participants see as "optimal" master agreement provisions. For a copy of the conference handout please visit November 30, 2006 - Improving Master Agreement and Related Trading Agreement Negotiations .
CROSS-AFFILIATE EXPOSURE RISK REDUCTION TECHNIQUES UNDER THE NEW BANKRPUTCY CODE SAFE HARBORS
At a GDSC conference in November 2006, the GDSC discussed various techniques designed to reduce counterparty risk and their treatment under recent statutory amendments to the U.S. Bankruptcy Code, as well as the GDSC's work to develop model “position flattening” provisions. These provisions operate to reduce operational and legal risk associated with the use of multiple dealer affiliates to trade differing products and permit collateral deliveries to be netted across legal entities and agreements. Indeed, these provisions sometimes go further and expressly amend the underlying master agreements to conform the eligible collateral definitions, applicable haircuts, and calculation and transfer provisions. For a copy of the conference handout please visit – November 30, 2006 - Cross Affiliate Exposure Risk Reduction Techniques Under the New Bankruptcy Code Safe Harbors Conference Handout and Conference Presentation .
Many market participants include an "escrow" clause in their master agreements that permits either party to make payments into escrow under certain circumstances. Such circumstances may include a concern about counterparty credit risk and/or mismatches in payment timing due to cross-currency settlements. These escrow provisions have historically been difficult to implement because neither party generally has the necessary arrangements in place with an escrow agent in advance of the time of their desired use. At its November 2006 conference, the GDSC discussed the use of escrow provisions, the stumbling blocks to their use and implementation, and ways in which they can be put into effect, including the development of a form of "master escrow agreement" that would reduce the time needed to put appropriate escrow arrangements in place with an escrow agent. For a copy of the conference handout please visit – November 30, 2006 - Escrow Conference Materials , Conference Presentation and GDSC Provision .
POLICY STATEMENT ON TRADER AUTHORIZATION LETTERS AND FORM RESPONSE LETTER
The GDSC had noted that certain financial market participants are sending dealers in derivatives and other financial products letters ("Trader Authorization Letters") that restrict trading authority and confirmation of transactions to certain specified individuals and may request dealing firm to ensure compliance with its counterparty's investment guidelines. The Committee issued a policy statement and a form response letter to market participants to discourage the use of Trader Authorization Letters. September 29, 2006 - Policy Statement on Trader Authorization Letters and Model Response Letter .
CRMPG II: "FINANCIAL INFRASTRUCTURE: DOCUMENTATION AND RELATED POLICIES AND PRACTICES"
In 2005, the Counterparty Risk Management Policy Group was reconvened as "CRMPG II." The primary goal of CRMPG II was to set forth additional steps to be taken by the private sector to promote efficiency, effectiveness and stability of the global financial system. At the request of CRMPG II, GDSC members took the lead in compiling an update of the documentation-related recommendations from the original 1999 CRMPG I report. Members of the GDSC and other volunteers produced Section IV of the CRMPG II report entitled "Financial Infrastructure: Documentation and Related Policies and Practices." For a copy of the CRMPG II report (and related background), please visit http://www.crmpolicygroup.org/ .
The GDSC produced a form of confidentiality agreement, intended to reduce negotiation through an even-handed approach to the concerns of both providers and recipients of information and to promote prompt execution. For a copy of the Confidentiality Agreement and the User's Guide, see November 10, 2004 - Confidentiality Agreement and User's Guide .
IMPROVING MASTER AGREEMENT AND RELATED TRADING AGREEMENT NEGOTIATIONS
The GDSC believed that the efficient functioning of the documentation process can be instrumental in reducing risk. Protracted negotiations may extend the risks attaching to undocumented relationships, delay the development of beneficial trading relationships and waste resources. Accordingly, the GDSC hosted a half-day conference to discuss its "Practitioner's Best Practice Guide" for improving master agreement and related trading agreement negotiations. The GDSC produced a "Practitioner's Best Practice Guide" that balances the interests of dealers and end-users and, in the spirit of such cooperation, seeks to improve the current state of documentation practices in the industry. For a copy of the GDSC's Guide, see October 26, 2004 - How to Improve Master Agreement and Related Trading Agreement Negotiations - A Practitioner's Best Practice Guide .
HARMONIZATION OF TIMEFRAMES
The GDSC addressed differences in close-out timeframes under various master agreements. The Committee agreed to espouse a single principle: a party to a financial contract should be able to declare an event of default for any non-payment no later than one local business day after notice of nonpayment, including interim payments, mark-to-market payments, payments in lieu of interest under repos, tax gross-up payments and payments/returns at maturity.
RECOMMENDED DEFAULT NOTICES
The GDSC recommended that industry standard documentation include standard forms of default notice. The GDSC believed that the availability of standard forms of default notice will facilitate the ability of market participants to act quickly in response to default situations.
The GDSC included three forms of notice in its recommendation, each intended to be used for a different purpose in the process of declaring a default and exercising remedies as a result of the default.
For a copy of the GDSC's proposed default notices (and related commentary), see January 24, 2003 - Recommended Default Notices and Commentary on Global Documentation Steering Committee Recommended Default Notice Provisions .
RECOMMENDED NOTICE PROVISION
The GDSC focused on notice provisions as pivotal in implementing the substantive provisions of agreements. Notice provisions not only may affect the timing of parties' actions under agreements, they may also affect the fundamental availability of rights or existence of duties. Accordingly, the GDSC undertook a review of how notice provisions have worked mechanically with the goal of producing a recommended notice provision combining features from existing industry standard documents with several innovations intended to enhance the ability to give notice in crisis situations.
For a copy of the GDSC's proposed recommended notice provision (and related background/commentary), see August 6, 2002 - Recommended Notice Provision and Commentary on Global Documentation Steering Committee Recommended Notice Provision .
RECOMMENDED INVOLUNTARY INSOLVENCY DEFAULT PROVISION
The GDSC recommended that industry standard documentation provide for the termination of the underlying trading relationship following the filing of an involuntary insolvency petition unless such petition is dismissed within 5 business days.
An involuntary insolvency default provision is a significant element in a credit sensitive document. Such a provision, if used appropriately, allows for the termination of the underlying relationship when the worst has come to pass and a speedy resolution and access to remedies is desirable. The recommended provision reflected an effort by the GDSC, based on a review of relevant precedent, to establish a consistent definition of an "involuntary insolvency event" that appropriately accommodates the interests of defaulting and non-defaulting parties.
The GDSC determined that where an insolvency proceeding is commenced by a governmental, regulatory or supervisory authority with primary jurisdiction over the defaulting party, the likelihood that such authority is acting in bad faith or without foundation is so insignificant that no grace period should be required. In such a case, an involuntary insolvency event occurs immediately upon commencement of the involuntary proceeding, or if the defaulting party has consented to the proceeding or has not timely contested it, or if a judgment or order has been entered or other similar relief has been provided adverse to the defaulting party.
In cases that do not involve a governmental or other authority,
the GDSC recognized that the defaulting party should be granted some period
of time, in the case of a bad faith or frivolous proceeding, to consult
with counterparties. The GDSC recommended a period of 5 business days
as an adequate period of time to notify counterparties and offer assurances
of its continuing ability to perform, notwithstanding commencement of
the proceeding. The GDSC's research made it clear that, if the period
were lengthened to the extent necessary to afford the defaulting party
a practical opportunity to obtain dismissal of an involuntary proceeding,
the longer grace period would entail an excessively high degree of uncertainty
and risk for the non-defaulting party.
RECOMMENDED CROSS-DEFAULT PROVISION
The GDSC recommended that industry standard documentation include a uniform cross-default provision allowing for the termination of a trading relationship upon the occurrences of matured defaults under indebtedness or trading transactions in amounts in excess of a materiality threshold.
The GDSC studied both cross-default and cross-acceleration provisions (collectively, "cross provisions") that are designed to protect against a situation where a party to an agreement is unable to find a basis to terminate that agreement while its counterparty's impeding financial collapse is revealed and perhaps hastened through the default structure of another agreement. The GDSC reviewed many factors including the differences between the two basic types of cross provisions, the scope of the other agreements that might trigger the cross provisions, the entities that might be involved in those other agreements and the effect of grace periods, materiality concepts and other potential parameters. The GDSC realized the need to balance a financially sound party's desire for a swift means of terminating deteriorating relationships against a weakened credit's interest in stability. The GDSC concluded that the historical reasons for maintaining both cross-default and cross-acceleration provisions do not outweigh the virtues of having a single, consistently applicable cross provision. For a copy of the GDSC's proposed cross-default provision (and related background), see November 29, 2001 - Memorandum Regarding Cross-Default Provision .
RECOMMENDED FORCE MAJEURE PROVISION
The GDSC undertook to prepare a uniform definition of a "Force
Majeure Event" that would capture the types of events that, while
not constituting an excuse from performance, should ordinarily trigger
early termination of a financial market transaction and application of
an appropriate contractual methodology for determining the remaining obligations
owed by the parties.
RECOMMENDED ADEQUATE ASSURANCES PROVISION
The GDSC developed a model adequate assurances clause. The GDSC determined that, in certain circumstances, it may be appropriate to include an adequate assurances clause in both master agreements for financial market transactions and confirmations of financial market transactions that are not subject to master agreements.
An adequate assurances clause can provide a party with a means of protecting itself against uncertainties that do not, by themselves, otherwise constitute an enumerated event of default or termination event under the applicable master agreement or confirmation. Such a clause may be particularly useful in master agreements with counterparties that are weaker credits and in the confirmation of transactions that typically are not subject to master agreements, such as certain short-dated foreign exchange transactions. Parties choosing to incorporate an adequate assurances provision in the documentation governing their trading relationship may include it as either an additional termination event or event of default.
Under the GDSC's recommended form of adequate assurances clause,
a demand for adequate assurances must be based on "reasonable grounds
for insecurity". This means that the party making a demand for adequate
assurances must have a demonstrably solid foundation for the demand based
on what a party would deem reasonable under similar circumstances.