ISDA Comparison: Difference between revisions

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==={{isdaprov|Close-Out Amount}} ===
{{a|isda|}}
So, you were wondering “what are the main differences between the {{1992isda}} and the {{2002isda}}?” Well, funny you should ask. I had the same question once upon a time, so I found out. They are below.<ref>What is that you say? You ''weren’t'' wondering about the differences between the {{1992isda}} and the {{2002isda}}? Well, in that case you might like [[Otto Büchstein]]’s uncelebrated opera, [[La Vittoria della Forma sulla Sostanza]]. </ref>
 
===[[Close-out]] method===
The {{2002ma}}, with its {{isdaprov|Close-Out Amount}}, is way simpler than the {{1992ma}} which gets bogged down with all this {{isdaprov|Loss}}, {{isdaprov|Market Quotation}}, {{isdaprov|First Method}}, {{isdaprov|Second Method}} malarkey. See Section [[6(e)(i) - 1992 ISDA provision]] for more detail though, trust me, if you do you will lament the hours of your life you will never get back.
====Two way payments only====
====Two way payments only====
The {{1992ma}} offered parties the choice between one-way payment (the “{{isdaprov|First Method}}”) and two-way payment (the “{{isdaprov|Second Method}}”) of a settlement amount following the early termination and liquidation of the {{1992ma}}. The {{2002ma}} provides for only two-way payment.  
The {{1992isda}} offered parties the choice between the outrageous one-way payment (the “{{isdaprov|First Method}}”) where only an innocent party could realise its net [[mark-to-market]] gain; and two-way payment (the “{{isdaprov|Second Method}}”) of the {{isdaprov|Settlement Amount}} following early termination, where a {{isdaprov|Non-defaulting Party}} could nonetheless find itself having to pay the {{isdaprov|Defaulting Party}} on close-out under the {{1992isda}}, where it was overall out-of-the-money on its {{isdaprov|Transaction}}s. Seeing as no-one with a functioning frontal lobe would (or, in the ten years of the {{1992ma}}, did) agree to the {{isdaprov|First Method}}, the {{2002isda}} ditched it and provided instead for only two-way payment, under the “{{isdaprov|Close-out Amount}}” concept.  Few tears were shed, though the famous transaction manager at a certain US house who, to this day, still insists on the {{1987ma}}, must have bridled a bit.
====Valuation Method====
====Valuation Method====
Likewise, the election of the {{isdaprov|Loss}} or {{isdaprov|Market Quotation}} method in the {{1992ma}} has been replaced with a hybrid valuation method called {{isdaprov|Close-Out Amount}}. {{isdaprov|Close-Out Amount}} was established in response to the following concerns:  
Likewise, the election of the counter-intuitive and needlessly convoluted {{isdaprov|Loss}}/{{isdaprov|Market Quotation}} methods in the {{1992isda}} has been replaced with a hybrid valuation method called {{isdaprov|Close-Out Amount}}. {{isdaprov|Close-Out Amount}} was established in response to the following concerns:  
*'''Reliability''': the {{isdaprov|Market Quotation}} valuation method is unreliable and potentially inaccurate in markets lacking adequate liquidity or in situations of market distress, and  
*'''Reliability''': {{isdaprov|Market Quotation}} was unreliable (in that few {{isdaprov|Reference Market-maker}}s would bother putting in a quote) and potentially inaccurate (in that those that did had no skin in the game and could just put in any number they liked, knowing it was never going to be traded on), especially in illiquid markets or at times of market stress (being the typical situations in which you would be closing out {{isdama}}s), and  
*'''Objectivity''': the inherent subjectivity of the {{isdaprov|Loss}} valuation method. {{isdaprov|Close-Out Amount}} is a calculation of the gains, losses, and costs incurred in replacing or realizing the economic equivalent of the {{isdaprov|Terminated Transaction}}s including (i) the cost of terminating, liquidating or re-establishing hedges so long as this value does not duplicate any other amount already included in the {{isdaprov|Close-Out Amount}} calculation; and (ii) the value of the option rights of the parties.  
*'''Objectivity''': the inherent subjectivity of the {{isdaprov|Loss}} valuation method. {{isdaprov|Close-Out Amount}} is a calculation of the gains, losses, and costs incurred in replacing or realizing the economic equivalent of the {{isdaprov|Terminated Transaction}}s including (i) the cost of terminating, liquidating or re-establishing [[hedge]]s so long as this value does not duplicate any other amount already included in the {{isdaprov|Close-Out Amount}} calculation; and (ii) the value of the option rights of the parties.  
*'''Valuation Process''': The {{isdaprov|Determining Party}} enjoys flexibility in its choice of price sources, including the option to use internal valuations so long as the internal information used is of the same type used in valuing similar {{isdaprov|Transaction}}s in the ordinary course of its  business. However, regardless of the valuation method used, the {{isdaprov|Determining Party}} must use third party quotations or market data in its valuations unless it believes the information is not available or would not provide commercially reasonable results. The {{isdaprov|Determining Party}} may consider its creditworthiness and any {{isdaprov|Credit Support Document}} ation existing between the {{isdaprov|Determining Party}} and the entity providing the quotation when obtaining {{isdaprov|Market Quotation}}s.  
*'''Valuation Process''': The {{isdaprov|Determining Party}} enjoys flexibility in its choice of price sources, including the option to use internal valuations so long as the internal information used is of the same type used in valuing similar {{isdaprov|Transaction}}s in the ordinary course of its  business. However, regardless of the valuation method used, the {{isdaprov|Determining Party}} must use third party quotations or market data in its valuations unless it believes the information is not available or would not provide commercially reasonable results. The {{isdaprov|Determining Party}} may consider its creditworthiness and any {{isdaprov|Credit Support Document}} ation existing between the {{isdaprov|Determining Party}} and the entity providing the quotation when obtaining {{isdaprov|Market Quotation}}s.  
*'''Force Majeure''': Special considerations exist when the {{isdaprov|Close-Out Amount}} is calculated following termination due to a {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}} . When calculating the {{isdaprov|Close-Out Amount}} for an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure}} , mid-{{isdaprov|Market Quotation}}s must be used to value the Termination {{isdaprov|Transaction}} , and the creditworthiness of the {{isdaprov|Determining Party}} may not be considered. The {{2002ma}} requires the {{isdaprov|Determining Party}} to use “commercially reasonably procedures to produce a commercially reasonable result” when calculating the {{isdaprov|Close-Out Amount}} . This calculation method may be less attractive to some parties than the old {{isdaprov|Loss}} method due to concerns that this requirement adds uncertainty and limits the {{isdaprov|Determining Party}} ’s discretion in calculating the {{isdaprov|Close-Out Amount}} .
*'''Force Majeure''': Special considerations exist when the {{isdaprov|Close-Out Amount}} is calculated following termination due to a {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}}. When calculating the {{isdaprov|Close-Out Amount}} for an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure}}, mid-{{isdaprov|Market Quotation}}s must be used to value the Termination {{isdaprov|Transaction}}, and the creditworthiness of the {{isdaprov|Determining Party}} may not be considered. The {{2002isda}} requires the {{isdaprov|Determining Party}} to use “commercially reasonably procedures to produce a commercially reasonable result” when calculating the {{isdaprov|Close-Out Amount}}. This calculation method may be less attractive to some parties than the old {{isdaprov|Loss}} method due to concerns that this requirement adds uncertainty and limits the {{isdaprov|Determining Party}} ’s discretion in calculating the {{isdaprov|Close-Out Amount}}.


==== {{isdaprov|Illegality}} and {{isdaprov|Force Majeure}} {{isdaprov|Termination Event}}s====  
==== {{isdaprov|Illegality}} and {{isdaprov|Force Majeure}} {{isdaprov|Termination Event}}s====  
Although the {{2002ma}} preserves most of the {{1992ma}}’s provisions concerning {{isdaprov|Termination Event}}s, it extensively changes {{isdaprov|Illegality}} and adds {{isdaprov|Force Majeure}} as a {{isdaprov|Termination Event}}.   
Although the {{2002isda}} preserves most of the {{1992isda}}’s provisions concerning {{isdaprov|Termination Event}}s, it extensively changes {{isdaprov|Illegality}} and adds {{isdaprov|Force Majeure}} as a {{isdaprov|Termination Event}}.   
*'''Illegality''': The definition of {{isdaprov|Illegality}} remains the same with the exception of the clarification that an {{isdaprov|Illegality}} exists even if it only affects a single Office so long as the affected Office is the Office through which payments and deliveries are made for the affected {{isdaprov|Transaction}} . <br>
*'''Illegality''': The definition of {{isdaprov|Illegality}} remains the same with the exception of the clarification that an {{isdaprov|Illegality}} exists even if it only affects a single Office so long as the affected Office is the Office through which payments and deliveries are made for the affected {{isdaprov|Transaction}}. <br>
*'''Force Majeure''': {{isdaprov|Force Majeure}} is undefined except as a “{{isdaprov|Force Majeure}} or act of state” that prevents a party from performing or causing performance to be impossible or impracticable. A party must use all reasonable efforts to overcome the {{isdaprov|Force Majeure}} , but it need not incur a loss in doing so. Either party may terminate the Agreement because of a {{isdaprov|Force Majeure}} unless the {{isdaprov|Force Majeure}} affects payment obligations under a {{isdaprov|Credit Support Document}} , in which case only the {{isdaprov|non-Affected party}} can terminate. The party affected by the {{isdaprov|Force Majeure}} is the {{isdaprov|Affected party}} and therefore the party that calculates the {{isdaprov|Close-Out Amount}} .  
*'''Force Majeure''': {{isdaprov|Force Majeure}} is undefined except as a “{{isdaprov|Force Majeure}} or act of state” that prevents a party from performing or causing performance to be impossible or impracticable. A party must use all reasonable efforts to overcome the {{isdaprov|Force Majeure}}, but it need not incur a loss in doing so. Either party may terminate the Agreement because of a {{isdaprov|Force Majeure}} unless the {{isdaprov|Force Majeure}} affects payment obligations under a {{isdaprov|Credit Support Document}}, in which case only the {{isdaprov|Non-affected Party}} can terminate. The party affected by the {{isdaprov|Force Majeure}} is the {{isdaprov|Affected Party}} and therefore the party that calculates the {{isdaprov|Close-Out Amount}}.  
*'''Waiting Periods''': A party is no longer required to attempt to transfer {{isdaprov|Transaction}}s as a condition to terminating for {{isdaprov|Illegality}} . However, for any {{isdaprov|Transaction}} affected by an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure}} , payment or delivery under the affected {{isdaprov|Transaction}} will be deferred until the expiration of a {{isdaprov|Waiting Period}} of three Local Business Days (for {{isdaprov|Illegality}}) or eight Local Business Days (for {{isdaprov|Force Majeure}}) . Termination and liquidation of the Affected {{isdaprov|Transaction}}s cannot occur until the {{isdaprov|Waiting Period}} has expired unless the {{isdaprov|Illegality}} or {{isdaprov|Force Majeure}} affects {{isdaprov|Credit Support Document}}s where delivery or payment is required on the relevant day, in which case there is no {{isdaprov|Waiting Period}}. Once the {{isdaprov|Waiting Period}} expires, the close-out calculation is made on the basis of mid-market values, reflecting the nofault nature of the {{isdaprov|Illegality}} and {{isdaprov|Force Majeure}} {{isdaprov|Termination Event}}s. Unless the {{isdaprov|Illegality}} or {{isdaprov|Force Majeure}} relates to obligations under a {{isdaprov|Credit Support Document}} (in which case the {{isdaprov|Affected party}} may not declare an {{isdaprov|Early Termination Date}}), either party may declare an {{isdaprov|Early Termination Date}} for {{isdaprov|Transaction}}s affected by an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure}} . The party declaring the {{isdaprov|Early Termination Date}} may terminate any or all Affected {{isdaprov|Transaction}}s. However, if a party terminates fewer than all Affected {{isdaprov|Transaction}}s, the other party can terminate on the declared {{isdaprov|Early Termination Date}} all or some of the remaining {{isdaprov| Affected Transaction}}s. <br>
*'''Waiting Periods''': A party is no longer required to attempt to transfer {{isdaprov|Transaction}}s as a condition to terminating for {{isdaprov|Illegality}}. However, for any {{isdaprov|Transaction}} affected by an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure}}, payment or delivery under the affected {{isdaprov|Transaction}} will be deferred until the expiration of a {{isdaprov|Waiting Period}} of three Local Business Days (for {{isdaprov|Illegality}}) or eight Local Business Days (for {{isdaprov|Force Majeure}}). Termination and liquidation of the Affected {{isdaprov|Transaction}}s cannot occur until the {{isdaprov|Waiting Period}} has expired unless the {{isdaprov|Illegality}} or {{isdaprov|Force Majeure}} affects {{isdaprov|Credit Support Document}}s where delivery or payment is required on the relevant day, in which case there is no {{isdaprov|Waiting Period}}. Once the {{isdaprov|Waiting Period}} expires, the close-out calculation is made on the basis of mid-market values, reflecting the nofault nature of the {{isdaprov|Illegality}} and {{isdaprov|Force Majeure}} {{isdaprov|Termination Event}}s. Unless the {{isdaprov|Illegality}} or {{isdaprov|Force Majeure}} relates to obligations under a {{isdaprov|Credit Support Document}} (in which case the {{isdaprov|Affected Party}} may not declare an {{isdaprov|Early Termination Date}}), either party may declare an {{isdaprov|Early Termination Date}} for {{isdaprov|Transaction}}s affected by an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure}}. The party declaring the {{isdaprov|Early Termination Date}} may terminate any or all Affected {{isdaprov|Transaction}}s. However, if a party terminates fewer than all Affected {{isdaprov|Transaction}}s, the other party can terminate on the declared {{isdaprov|Early Termination Date}} all or some of the remaining {{isdaprov| Affected Transaction}}s. <br>
*'''Conflict between Provisions''': The {{2002ma}} expands upon the hierarchy provisions the {{1992ma}} in response to the new {{isdaprov|Force Majeure}} and {{isdaprov|Illegality}} provisions by addressing the treatment of occurrences that could constitute both a {{isdaprov|Force Majeure}} and an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}} and an {{isdaprov|Event of Default}} or {{isdaprov|Termination Event}} other than {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}} (such {{isdaprov|Termination Event}}s referred to as “Other {{isdaprov|Termination Event}}s”). The hierarchy was revised in response to concerns that the presence of both an {{isdaprov|Illegality}} and a {{isdaprov|Force Majeure}} {{isdaprov|Termination Event}} could muddy the waters as to which provision should be looked to if both could apply and to address the concern that an {{isdaprov|Illegality}} or {{isdaprov|Force Majeure}} could mask a credit-related default and give a party in default under a credit-related {{isdaprov|Event of Default}} more generous rights under the {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}} provisions.  
*'''Conflict between Provisions''': The {{2002isda}} expands upon the hierarchy provisions the {{1992isda}} in response to the new {{isdaprov|Force Majeure}} and {{isdaprov|Illegality}} provisions by addressing the treatment of occurrences that could constitute both a {{isdaprov|Force Majeure}} and an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}} and an {{isdaprov|Event of Default}} or {{isdaprov|Termination Event}} other than {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}} (such {{isdaprov|Termination Event}}s referred to as “Other {{isdaprov|Termination Event}}s”). The hierarchy was revised in response to concerns that the presence of both an {{isdaprov|Illegality}} and a {{isdaprov|Force Majeure}} {{isdaprov|Termination Event}} could muddy the waters as to which provision should be looked to if both could apply and to address the concern that an {{isdaprov|Illegality}} or {{isdaprov|Force Majeure}} could mask a credit-related default and give a party in default under a credit-related {{isdaprov|Event of Default}} more generous rights under the {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}} provisions.  
*'''Hierarchy Rules''': Under the {{2002ma}}, the hierarchy rules are as follows:  
*'''Hierarchy Rules''': Under the {{2002isda}}, the hierarchy rules are as follows:  
#if an occurrence would constitute an {{isdaprov|Illegality}} '''''and''''' a {{isdaprov|Force Majeure}} , the occurrence will be treated as an {{isdaprov|Illegality}} ;  
#if an occurrence would constitute an {{isdaprov|Illegality}} '''''and''''' a {{isdaprov|Force Majeure}}, the occurrence will be treated as an {{isdaprov|Illegality}} ;  
#if an occurrence would constitute an {{isdaprov|Illegality}} '''''or''''' {{isdaprov|Force Majeure}} '''''and''''' an {{isdaprov|Event of Default}} under {{isdaprov|Section 5(a)(i)}}, {{isdaprov|Section 5(a)(ii)}}(1), or {{isdaprov|5(a)(iii)}}(1), it will be treated as an {{isdaprov|Illegality}} or {{isdaprov|Force Majeure}}  so long as the occurrence relates to a failure to make any payment or delivery, failure to comply with a material term of the Agreement, or a failure to comply with a material provision of the {{2002ma}} or any {{isdaprov|Credit Support Document}} ; and  
#if an occurrence would constitute an {{isdaprov|Illegality}} '''''or''''' {{isdaprov|Force Majeure}} '''''and''''' an {{isdaprov|Event of Default}} under Section {{isdaprov|5(a)(i)}}, Section {{isdaprov|5(a)(ii)}}(1), or {{isdaprov|5(a)(iii)}}(1), it will be treated as an {{isdaprov|Illegality}} or {{isdaprov|Force Majeure}}  so long as the occurrence relates to a failure to make any payment or delivery, failure to comply with a material term of the Agreement, or a failure to comply with a material provision of the {{2002isda}} or any {{isdaprov|Credit Support Document}} ; and  
#if an occurrence would constitute an {{isdaprov|Illegality}} '''''or''''' {{isdaprov|Force Majeure}} '''''and''''' an {{isdaprov|Event of Default}} (other than an {{isdaprov|Event of Default}} as described in clause (ii)) or Other {{isdaprov|Termination Event}} , then it will be treated as the applicable {{isdaprov|Event of Default}} or Other {{isdaprov|Termination Event}} and not as a {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}}
#if an occurrence would constitute an {{isdaprov|Illegality}} '''''or''''' {{isdaprov|Force Majeure}} '''''and''''' an {{isdaprov|Event of Default}} (other than an {{isdaprov|Event of Default}} as described in clause (ii)) or Other {{isdaprov|Termination Event}}, then it will be treated as the applicable {{isdaprov|Event of Default}} or Other {{isdaprov|Termination Event}} and not as a {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}}
 
===={{isdaprov|Events of Default}} ====
The {{isdaprov|Events of Default}} in the {{1992ma}} have proven successful and were spared major modification in the {{2002ma}}. Many participants have observed that changing market conditions merit some changes to the {{isdaprov|Events of Default}} however, and some revisions have been made to reflect these changes. These changes include
*'''Cure Periods''': Some of the cure periods were reduced out of the concern that these cure periods create undue risk when market volatility increases in times of turmoil in the financial markets. This was addressed in the {{2002ma}} by:
#reducing the cure period for a failure to pay or deliver pursuant to Section 5(a)(i) from three Local Business Days to one Local Business Day following notice of such failure;
#reducing the cure period for a payment {{isdaprov|Default Under Specified Transaction}} pursuant to Section 5(a)(v)(2) from three Local Business Days to one Local Business Day; and
#reducing the cure period for an involuntary bankruptcy filing pursuant to Section 5(a)(vii)(1)(B) from thirty to fifteen days.
*'''{{isdaprov|Breach of Agreement}}''': An additional subsection has been added to the {{isdaprov|Breach of Agreement}} {{isdaprov|Event of Default}} in Section 5(a)(ii) that establishes an {{isdaprov|Event of Default}} when “the party disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, this Master Agreement, any Confirmation executed and delivered by that party or any {{isdaprov|Transaction}} evidenced by such a Confirmation (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf).” Although this additional subsection is part of Section 5(a)(ii), the thirty day cure period applies only to Section 5(a)(ii)(1) and not to the new subparagraph (2). This new {{isdaprov|Event of Default}} is similar to the {{isdaprov|Credit Support Default}} {{isdaprov|Event of Default}} in Section 5(a)(iii)(3) of the {{1992ma}}, which was also included in the {{2002ma}}.
*'''{{isdaprov|Default under Specified Transaction}}''': This {{isdaprov|Event of Default}} was expanded in five significant ways:
#Delivery and other general defaults require the liquidation or early termination of the {{isdaprov|Specified Transaction}} (for general defaults) or the liquidation or early termination of all outstanding {{isdaprov|Transaction}}s under the documentation supporting the {{isdaprov|Specified Transaction}} (for a delivery default). This change was made with repos in mind because a failure under a repo is not uncommon and may not be indicative of the {{isdaprov|Defaulting Party}}’s creditworthiness, particularly when the default concerns delivery obligations.
#This {{isdaprov|Event of Default}} may now be triggered by a default under a credit support arrangement relating to a {{isdaprov|Specified Transaction}} . {{isdaprov|Specified Transaction}} credit support arrangements were not addressed in the {{1992ma}}.
# As discussed above, the cure period for the failure to make a final payment or early termination payment in respect of a {{isdaprov|Specified Transaction}} has been reduced from three days to one.
#The repudiation subsection was modified in two significant ways:  (i) the phrase “or challenges the validity of” was added after “disaffirms, disclaims, repudiates or rejects” to reduce ambiguity as to whether a party’s action Page 5 constitutes a repudiation; and (ii) a Non-{{isdaprov|Defaulting Party}} is now required to possess evidence of such repudiation that is executed and delivered by the {{isdaprov|Defaulting Party}}, its Credit Support Provider, or a Specified Entity; (iii) The definition of {{isdaprov|Specified Transaction}} has been broadened to include additional types of {{isdaprov|Transaction}}s market participants commonly add to Schedules to the Master Agreement, such as repos, and includes a catchall clause designed to include any future derivative products that are not specifically enumerated in this definition.
*'''{{isdaprov|Cross Default}}''': The formula for determining a {{isdaprov|Cross Default}} has been revised to permit the aggregation of amounts owed under multiple defaults. In determining whether the {{isdaprov|Cross Default}} threshold has been exceeded, the principal amount of the accelerated obligations in subparagraph (i) and the unpaid amount under subparagraph (ii) are added together to determine whether the {{isdaprov|Cross Default}} threshold has been exceeded. In the {{1992ma}}, subparagraphs (i) and (ii) could not be combined to evidence a {{isdaprov|Cross Default}}.
*'''{{isdaprov|Merger Without Assumption}}''': The types of events that constitute a “merger” have been broadened to include reorganization, reincorporation and reconstitution, and the methods by which a resulting, surviving or transferee entity can assume obligations have been deleted.
*'''{{isdaprov|Credit Support Default}}''': The failure of a security interest granted pursuant to a {{isdaprov|Credit Support Document}} now constitutes a {{isdaprov|Credit Support Default}}.
*'''{{isdaprov|Set-Off}}''':  The absence of a {{isdaprov|Set-Off}} provision is seen by many as the biggest weakness of the {{1992ma}}. Although the User’s Guide to the {{1992ma}} included an optional {{isdaprov|Set-Off}} provision, the optional provision was not effective unless the parties added the provision to the Schedule to the {{1992ma}}. The {{2002ma}} remedies this concern by including a {{isdaprov|Set-Off}} provision that is similar to the provision included in the User’s Guide. This provision permits the Non- {{isdaprov|Defaulting Party}} to {{isdaprov|Set-Off}} any amounts owing between the parties against any early termination amount. While cross-product {{isdaprov|Set-Off}} is permitted, cross-affiliate {{isdaprov|Set-Off}} is not incorporated into this provision. The User’s Guide also suggested adding a representation to satisfy the requirement that mutuality must exist between the parties for a {{isdaprov|Set-Off}} to be effected. In response to this concern, the {{2002ma}} includes an additional representation in Section 3(g) that both parties are principals in respect of all {{isdaprov|Transaction}}s.


{{anat|isda}}
=={{isdaprov|Events of Default}} ==
The {{isdaprov|Events of Default}} in the {{1992isda}} were not massively changed in the {{2002isda}}. Some revisions were made to reflect changes in market practice (by which parties would religiously, tediously, amend their 1992 {{isdaprov|Schedule}}s) including:
====Cure Periods====
Some of the cure periods were reduced out of the concern that these cure periods create undue risk when market volatility increases in times of turmoil in the financial markets. This was addressed in the {{2002isda}} by reducing the cure periods:
:*Under {{isdaprov|Failure to Pay or Deliver}} from three {{isdaprov|Local Business Day}}s to one;
:*For a payment {{isdaprov|Default Under Specified Transaction}} (Section {{isdaprov|5(a)(v)}}(2)) from three {{isdaprov|Local Business Day}}s to one; and
:*For an involuntary {{isdaprov|Bankruptcy}} filing pursuant to Section {{isdaprov|5(a)(vii)}}(1)(B) from 30 to 15days.
===={{isdaprov|Breach of Agreement}}====
An additional subsection has been added to the {{isdaprov|Breach of Agreement}} {{isdaprov|Event of Default}} (Section {{isdaprov|5(a)(ii)}} that establishes an {{isdaprov|Event of Default}} when “the party disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, this Master Agreement, any {{isdaprov|Confirmation}} executed and delivered by that party or any {{isdaprov|Transaction}} evidenced by such a {{isdaprov|Confirmation}} (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf).” Although this additional subsection is part of Section {{isdaprov|5(a)(ii)}}, the 30 day cure period applies only to Section {{isdaprov|5(a)(ii)}}(1) and not to the new subparagraph (2). This new {{isdaprov|Event of Default}} is similar to the {{isdaprov|Credit Support Default}} {{isdaprov|Event of Default}} in Section {{isdaprov|5(a)(iii)}}(3) of the {{1992isda}}, which was also included in the {{2002isda}}.
===={{isdaprov|DUST}}====
{{isda 5(a)(v) comm|isdaprov}}
===={{isdaprov|Cross Default}}====
The formula for determining a {{isdaprov|Cross Default}} has been revised to permit the aggregation of amounts owed under multiple defaults. In determining whether the {{isdaprov|Cross Default}} threshold has been exceeded, the principal amount of the accelerated obligations in subparagraph (i) and the unpaid amount under subparagraph (ii) are added together to determine whether the {{isdaprov|Cross Default}} threshold has been exceeded. In the {{1992isda}}, subparagraphs (i) and (ii) could not be combined to evidence a {{isdaprov|Cross Default}}.
===={{isdaprov|Merger Without Assumption}}====
The types of events that constitute a “[[merger]]” have been broadened to include reorganization, reincorporation and reconstitution, and the methods by which a resulting, surviving or transferee entity can assume obligations have been deleted.
===={{isdaprov|Credit Support Default}}====
The failure of a security interest granted pursuant to a {{isdaprov|Credit Support Document}} now constitutes a {{isdaprov|Credit Support Default}}.
===={{isdaprov|Set-Off}}====
The absence of a {{isdaprov|Set-Off}} provision is seen by many as the biggest weakness of the {{1992isda}}. Although the User’s Guide to the {{1992isda}} included an optional {{isdaprov|Set-Off}} provision, the optional provision was not effective unless the parties added the provision to the Schedule to the {{1992isda}}. The {{2002isda}} remedies this concern by including a {{isdaprov|Set-Off}} provision that is similar to the provision included in the User’s Guide. This provision permits the Non- {{isdaprov|Defaulting Party}} to {{isdaprov|Set-Off}} any amounts owing between the parties against any early termination amount. While cross-product {{isdaprov|Set-Off}} is permitted, cross-affiliate {{isdaprov|Set-Off}} is not incorporated into this provision. The User’s Guide also suggested adding a representation to satisfy the requirement that mutuality must exist between the parties for a {{isdaprov|Set-Off}} to be effected. In response to this concern, the {{2002isda}} includes an additional representation in Section {{isdaprov|3(g)}} that both parties are principals in respect of all {{isdaprov|Transaction}}s.
{{ref}}

Latest revision as of 10:55, 24 September 2020

ISDA Anatomy™
Index: Click ᐅ to expand:
ISDA
Navigation
See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.
The Varieties of ISDA Experience
Subject 2002 (wikitext) 1992 (wikitext) 1987 (wikitext)
Preamble Pre Pre Pre
Interpretation 1 1 1
Obligns/Payment 2 2 2
Representations 3 3 3
Agreements 4 4 4
EODs & Term Events 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • FM • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUSS • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM
Early Termination 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations; Payment Date • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET
Transfer 7 7 7
Contractual Currency 8 8 8
Miscellaneous 9 9 9
Offices; Multibranch Parties 10 10 10
Expenses 11 11 11
Notices 12 12 12
Governing Law 13 13 13
Definitions 14 14 14
Schedule Schedule Schedule Schedule
Termination Provisions Part 1 Part 1 Part 1
Tax Representations Part 2 Part 2 Part 2
Documents for Delivery Part 3 Part 3 Part 3
Miscellaneous Part 4 Part 4 Part 4
Other Provisions Part 5 Part 5 Part 5
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So, you were wondering “what are the main differences between the 1992 ISDA and the 2002 ISDA?” Well, funny you should ask. I had the same question once upon a time, so I found out. They are below.[1]

Close-out method

The 2002 ISDA, with its Close-Out Amount, is way simpler than the 1992 ISDA which gets bogged down with all this Loss, Market Quotation, First Method, Second Method malarkey. See Section 6(e)(i) - 1992 ISDA provision for more detail though, trust me, if you do you will lament the hours of your life you will never get back.

Two way payments only

The 1992 ISDA offered parties the choice between the outrageous one-way payment (the “First Method”) where only an innocent party could realise its net mark-to-market gain; and two-way payment (the “Second Method”) of the Settlement Amount following early termination, where a Non-defaulting Party could nonetheless find itself having to pay the Defaulting Party on close-out under the 1992 ISDA, where it was overall out-of-the-money on its Transactions. Seeing as no-one with a functioning frontal lobe would (or, in the ten years of the 1992 ISDA, did) agree to the First Method, the 2002 ISDA ditched it and provided instead for only two-way payment, under the “Close-out Amount” concept. Few tears were shed, though the famous transaction manager at a certain US house who, to this day, still insists on the 1987 ISDA, must have bridled a bit.

Valuation Method

Likewise, the election of the counter-intuitive and needlessly convoluted Loss/Market Quotation methods in the 1992 ISDA has been replaced with a hybrid valuation method called Close-Out Amount. Close-Out Amount was established in response to the following concerns:

  • Reliability: Market Quotation was unreliable (in that few Reference Market-makers would bother putting in a quote) and potentially inaccurate (in that those that did had no skin in the game and could just put in any number they liked, knowing it was never going to be traded on), especially in illiquid markets or at times of market stress (being the typical situations in which you would be closing out ISDA Master Agreements), and
  • Objectivity: the inherent subjectivity of the Loss valuation method. Close-Out Amount is a calculation of the gains, losses, and costs incurred in replacing or realizing the economic equivalent of the Terminated Transactions including (i) the cost of terminating, liquidating or re-establishing hedges so long as this value does not duplicate any other amount already included in the Close-Out Amount calculation; and (ii) the value of the option rights of the parties.
  • Valuation Process: The Determining Party enjoys flexibility in its choice of price sources, including the option to use internal valuations so long as the internal information used is of the same type used in valuing similar Transactions in the ordinary course of its business. However, regardless of the valuation method used, the Determining Party must use third party quotations or market data in its valuations unless it believes the information is not available or would not provide commercially reasonable results. The Determining Party may consider its creditworthiness and any Credit Support Document ation existing between the Determining Party and the entity providing the quotation when obtaining Market Quotations.
  • Force Majeure: Special considerations exist when the Close-Out Amount is calculated following termination due to a Force Majeure or Illegality. When calculating the Close-Out Amount for an Illegality or a Force Majeure, mid-Market Quotations must be used to value the Termination Transaction, and the creditworthiness of the Determining Party may not be considered. The 2002 ISDA requires the Determining Party to use “commercially reasonably procedures to produce a commercially reasonable result” when calculating the Close-Out Amount. This calculation method may be less attractive to some parties than the old Loss method due to concerns that this requirement adds uncertainty and limits the Determining Party ’s discretion in calculating the Close-Out Amount.

Illegality and Force Majeure Termination Events

Although the 2002 ISDA preserves most of the 1992 ISDA’s provisions concerning Termination Events, it extensively changes Illegality and adds Force Majeure as a Termination Event.

  1. if an occurrence would constitute an Illegality and a Force Majeure, the occurrence will be treated as an Illegality ;
  2. if an occurrence would constitute an Illegality or Force Majeure and an Event of Default under Section 5(a)(i), Section 5(a)(ii)(1), or 5(a)(iii)(1), it will be treated as an Illegality or Force Majeure so long as the occurrence relates to a failure to make any payment or delivery, failure to comply with a material term of the Agreement, or a failure to comply with a material provision of the 2002 ISDA or any Credit Support Document ; and
  3. if an occurrence would constitute an Illegality or Force Majeure and an Event of Default (other than an Event of Default as described in clause (ii)) or Other Termination Event, then it will be treated as the applicable Event of Default or Other Termination Event and not as a Force Majeure or Illegality

Events of Default

The Events of Default in the 1992 ISDA were not massively changed in the 2002 ISDA. Some revisions were made to reflect changes in market practice (by which parties would religiously, tediously, amend their 1992 Schedules) including:

Cure Periods

Some of the cure periods were reduced out of the concern that these cure periods create undue risk when market volatility increases in times of turmoil in the financial markets. This was addressed in the 2002 ISDA by reducing the cure periods:

Breach of Agreement

An additional subsection has been added to the Breach of Agreement Event of Default (Section 5(a)(ii) that establishes an Event of Default when “the party disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, this Master Agreement, any Confirmation executed and delivered by that party or any Transaction evidenced by such a Confirmation (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf).” Although this additional subsection is part of Section 5(a)(ii), the 30 day cure period applies only to Section 5(a)(ii)(1) and not to the new subparagraph (2). This new Event of Default is similar to the Credit Support Default Event of Default in Section 5(a)(iii)(3) of the 1992 ISDA, which was also included in the 2002 ISDA.

DUST

DUST has been expanded in five significant ways by the 2002 ISDA. See the summary and general sections for details.

Cross Default

The formula for determining a Cross Default has been revised to permit the aggregation of amounts owed under multiple defaults. In determining whether the Cross Default threshold has been exceeded, the principal amount of the accelerated obligations in subparagraph (i) and the unpaid amount under subparagraph (ii) are added together to determine whether the Cross Default threshold has been exceeded. In the 1992 ISDA, subparagraphs (i) and (ii) could not be combined to evidence a Cross Default.

Merger Without Assumption

The types of events that constitute a “merger” have been broadened to include reorganization, reincorporation and reconstitution, and the methods by which a resulting, surviving or transferee entity can assume obligations have been deleted.

Credit Support Default

The failure of a security interest granted pursuant to a Credit Support Document now constitutes a Credit Support Default.

Set-Off

The absence of a Set-Off provision is seen by many as the biggest weakness of the 1992 ISDA. Although the User’s Guide to the 1992 ISDA included an optional Set-Off provision, the optional provision was not effective unless the parties added the provision to the Schedule to the 1992 ISDA. The 2002 ISDA remedies this concern by including a Set-Off provision that is similar to the provision included in the User’s Guide. This provision permits the Non- Defaulting Party to Set-Off any amounts owing between the parties against any early termination amount. While cross-product Set-Off is permitted, cross-affiliate Set-Off is not incorporated into this provision. The User’s Guide also suggested adding a representation to satisfy the requirement that mutuality must exist between the parties for a Set-Off to be effected. In response to this concern, the 2002 ISDA includes an additional representation in Section 3(g) that both parties are principals in respect of all Transactions.

References

  1. ↑ What is that you say? You weren’t wondering about the differences between the 1992 ISDA and the 2002 ISDA? Well, in that case you might like Otto Büchstein’s uncelebrated opera, La Vittoria della Forma sulla Sostanza.
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