Very clever, McDonalds! Equating one of your signature meals—the Egg McMuffin—to “excellence” is a bit of a stretch, but then seeing the term take off into our daily lexicon is, well, pure genius! Whereas other companies struggle mightily to get their share of the American mind, McDonalds has had a good track record with their marketing campaigns, getting us to admit just how much we are “lovin it,” or at various times getting us to rap their entire menu, and even getting us to bet one another Big Macs as we sink baskets with Dwight Howard and LeBron James (and earlier Larry Bird and MJ) “over the Grand Canyon, off the scoreboard, with nothing but net.”
Good marketing has always seemed to find its way into our lives and language, but even the best commercials can be short-lived. Today’s kids are now “messin’ with Sasquatch,” not “snappin’ into Slimjims.” They’re cleaning their dirty mouths with Orbit, not doubling their fun with Doublemint gum. But at least they are better mannered, as they now “respect the pouch,” and no longer yell, “Hey! Kool-Aid!” You gotta be quick to catch the next catchphrase, or else you will date yourself and look so not cool. So with that in mind, we decided to get all of our Egg McMuffin metaphors out of the way now so we’ll be ready for the next big thing too!
“It was the Egg McMuffin of all ISDA negotiations.” To be like this favorite of breakfast meals, your ISDA negotiation needs to be first and foremost, fast. We’re talking no more than a few weeks, and ideally no more than several days. Too often these discussions languish for months due to a lack of real interest on the part of one or both parties. Nobody wants a cold, old Egg McMuffin. Get it while it’s hot and be prepared to review and return documents quickly, to get your trading relationship up and running. Egg McMuffins are also quite delicious, so your ISDA negotiation should not leave a bad taste in your mouth with unilateral provisions or uneven protections. To be sure, most banks will lead with their preferred language, and the burden is on you to negotiate better terms. For example, it’s not uncommon to see additional termination events (ATEs) that apply to only you, or higher thresholds for your counterparty than for you when posting collateral (for those agreements with a Credit Support Annex). Don’t be afraid to push back on “non-negotiable” ISDAs with fair and reasonable markups, and request the protections you need to manage the relationship and counterparty risk. Only then can you truly say this was a satisfying meal.
“That was the Egg McMuffin of all derivative deals.” Simple terms, competitive pricing, and transparent execution—that’s what makes a trade an Egg McMuffin. Start by insisting on simple loan language, and pay close attention to the calculation of interest. Don’t let your documents limit your choices. Over-reaching ratings requirements on prospective cap providers, for example, could disqualify anyone but your lender. You should be able to bring your derivative transaction to anyone who wants to see it, within reason, to foster competition for your business. Confirming terms and getting an indication from every participant will ensure that all dealers have it modeled correctly and are ready to trade when you are. Whether the trade is large enough for a competitive auction, or whether it is simply negotiated with a preferred counterparty, you will want to know where your trade got done relative to mid-market. It’s very satisfying indeed to see the post-trade results and know you got the best execution possible for a given trade, time, and term sheet. And just like the Egg McMuffin, you will know when it’s done right, and will compare all future breakfasts to this memorable meal!
“You are the Egg McMuffin of all counterparties!” Aside from the fact that Egg McMuffins are served fast and delicious, we should probably point out that they might not be the healthiest of meal choices. Too much of a good thing rarely is. That’s why counterparty management is such an important part of your risk management program. You may find that one counterparty is so compelling, due to pricing, service or other business relationships, that you want to bring every new derivative deal their way. That’s great, until you wake up one day and realize your counterparty stopped serving breakfast – or any other deal for that matter. Resist the urge to eat only Egg McMuffins, and diversify your counterparty risk as you add more deals to your program. But be mindful that while it’s probably bad to do everything with a single counterparty, its equally bad for you to set up too many relationships that you don’t intend to use. Look, banks are hungry for your business, but they will learn to eat elsewhere if you never show them your deals, and give you their “full” price when you finally come back to the table.
If you have questions on interest rate, currency, or commodity risk, give us a call! Let us show you how we can be the Egg McMuffin of all derivative advisors!