Sometimes you run into an issue that is so blatantly obvious -and with such great frequency – that you say to yourself, “I have got to be seeing ghosts – this can’t really be an issue, can it?” The definition of what constitutes “Spot FX” is one of these issues that is on our minds today at TSR.

THE SETTING

Who says that derivatives issues are boring – this one has a setting.

You have a master trading agreement of one sort or another and you want to make sure that

1) the default terms give you protection to close out and net your obligations under open trades (including your spot FX trades), in the event that your fx counterparty becomes a bankrupt fx counterparty or even some other, less dramatic event of default occurs in respect of the counterparty (such as a misrepresentation or payment default); BUT

2) spot FX are not subject to collateral requirements under that agreement.

So, you include a few provisions in your agreement that reference “spot FX” and articulate in a clear and concise manner exactly what you expect to happen (or not happen) vis a vis those types of trades and you have solved your problem, right?

THE PROBLEM THAT YOU HAVE CREATED

Wrong. You just created an issue for yourself because most trading documents do not actually define “spot FX.” (And, just as an aside, we have run into this issue in loan documents, as well.)

So what, you ask, everybody knows that spot FX means a forward period of two business days or less, right? Depends who you ask – some people say 2 days and some say 7 days.

SO WHAT IS THE RIGHT ANSWER

Define spot FX or, better yet, do not use the phrase at all. Rather, include a provision to the effect that the agreement (or provision, etc. whatever the case may be) does or does not apply to any trade with a stated tenor of “X” days or less.

In other words, say what you mean and mean what you say.

P.S. – “Say What You Mean and Mean What You Say” – complements of the song “Clichés” from Jimmy Buffet’s 1978 release Havana Daydreamin’ so are the words “Full Moon, So Soon, Wishin’ Every Month of the Year Could Be June” but TSR could not manage to fit that into this entry in any way other than a purely gratuitous P.S.