Today, hot off the presses of Reuters and the UK’s New Statesman, questions are being raised about the legal conditions governing the ranking of Spain’s creditors, citing part (Section 2.19, (b), (i), (B)) of the Credit Derivatives Definitions issued by the International Swaps and Derivatives Association (ISDA).
The following paragraph is being used as an example of impenetrable legal theory. You will notice liberal use of acronyms in the above articles (one of my favourite things… see here):
- CDS – credit default swaps
- EFSF – European Financial Stability Facility
- ESM – European Stability Mechanism
“Subordination” means, with respect to an obligation (the “Subordinated Obligation”) and another obligation of the Reference Entity to which such obligation is being compared (the “Senior Obligation”), a contractual, trust or similar arrangement providing that (i) upon the liquidation, dissolution, reorganization or winding up of the Reference Entity, claims of the holders of the Senior Obligation will be satisfied prior to the claims of the holders of the Subordinated Obligation or (ii) the holders of the Subordinated Obligation will not be entitled to receive or retain payments in respect of their claims against the Reference Entity at any time that the Reference Entity is in payment arrears or is otherwise in default under the Senior Obligation. “Subordinated” will be construed accordingly. For purposes of determining whether Subordination exists or whether an obligation is Subordinated with respect to another obligation to which it is being compared, the existence of preferred creditors arising by operation of law or of collateral, credit support or other credit enhancement arrangements shall not be taken into account, except that, notwithstanding the foregoing, priorities arising by operation of law shall be taken into account where the Reference Entity is a Sovereign.
Here’s the thing though. I hate to say this for fear of being lynched, but despite the journalists’ comments (e.g. “it doesn’t get much more impenetrable than this”, and “unreadable legalese”), I don’t think this paragraph is too bad at all compared to many texts I see when translating. What do you think?
To find out more, you may be interested in reading this Allen & Overy report from October 2011 on Sovereign state restructurings and credit default swaps.