Template:M gen 2002 ISDA 6(f): Difference between revisions

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===Red letter day for {{icds}}===
Whatever else you might have to say about ISDA’s set off provision — and as this page demonstrates, there’s quite a bit to say — one thing that stands out is ''how appallingly drafted it is''.
The expression, “in circumstances where there is a Defaulting Party or where there is one Affected Party in the case where either a Credit Event Upon Merger has occurred or any other Termination Event in respect of which all outstanding Transactions are Affected Transactions has occurred” will make your head spin, but it is meant to strike two contingencies: ''All'' {{isdaprov|Transactions}} are being terminated, and ''one'' Party is at fault.
The [[’squad]]’s own pedantic approach to drafting, which separates {{isdaprov|Events of Default}} from {{isdaprov|Termination Event}}s, and labels the perpetrators differently (“{{isdaprov|Defaulting Party}}” for the former; “{{isdaprov|Affected Party}}” for the latter, is to blame here.
In any case one would only impose Section {{isdaprov|6(f)}} set off where your counterparty has gone fully ''[[tetas arriba]]'' and you have terminated all {{isdaprov|Transactions}}. In any other cases you would effect set-offs by mutually-agreed-at-the-time payment netting, which does not require any pre-existing legal right.
===Cross-[[affiliate]] [[set-off]]===
===Cross-[[affiliate]] [[set-off]]===
The {{2002ma}}’s {{isdaprov|Set-off}} provision refers to a “{{isdaprov|Payer}}” and “{{isdaprov|Payee}}”. Since either the “{{isdaprov|Payer}}” or the “{{isdaprov|Payee}}” could be the {{isdaprov|Innocent Party}}<ref>i.e., non-{{isdaprov|Defaulting Party}} or the non-{{isdaprov|Affected Party}}.</ref>, including {{isdaprov|Affiliates}} into the 2002 definition becomes problematic and cumbersome.  
The {{2002ma}}’s {{isdaprov|Set-off}} provision refers to a “{{isdaprov|Payer}}” and “{{isdaprov|Payee}}”. Since either the “{{isdaprov|Payer}}” or the “{{isdaprov|Payee}}” could be the {{isdaprov|Innocent Party}}<ref>i.e., non-{{isdaprov|Defaulting Party}} or the non-{{isdaprov|Affected Party}}.</ref>, including {{isdaprov|Affiliates}} into the 2002 definition becomes problematic and cumbersome.  

Latest revision as of 10:05, 27 September 2021

Red letter day for ISDA’s crack drafting squad

Whatever else you might have to say about ISDA’s set off provision — and as this page demonstrates, there’s quite a bit to say — one thing that stands out is how appallingly drafted it is.

The expression, “in circumstances where there is a Defaulting Party or where there is one Affected Party in the case where either a Credit Event Upon Merger has occurred or any other Termination Event in respect of which all outstanding Transactions are Affected Transactions has occurred” will make your head spin, but it is meant to strike two contingencies: All Transactions are being terminated, and one Party is at fault.

The ’squad’s own pedantic approach to drafting, which separates Events of Default from Termination Events, and labels the perpetrators differently (“Defaulting Party” for the former; “Affected Party” for the latter, is to blame here.

In any case one would only impose Section 6(f) set off where your counterparty has gone fully tetas arriba and you have terminated all Transactions. In any other cases you would effect set-offs by mutually-agreed-at-the-time payment netting, which does not require any pre-existing legal right.

Cross-affiliate set-off

The 2002 ISDA’s Set-off provision refers to a “Payer” and “Payee”. Since either the “Payer” or the “Payee” could be the Innocent Party[1], including Affiliates into the 2002 definition becomes problematic and cumbersome.

Generally, market practice is therefore to do the following:

But cross affiliate set-off is a pretty rum affair in any case. Generally, set-off requires mutuality of payment, currency, time and counterparty, so setting off between affiliates is liable to challenge anyway (unless you have cross-guarantee arrangements). And in these modern days of bank recovery and resolution, conjoining claims between entities which are supposed to be siloed and independent isn’t really the thing.

Scope of Set-off

The 2002 ISDA set-off wording allows set-off following an Event of Default, CEUM, or any other Termination Event where there is one Affected Party and all outstanding transactions are Affected Transactions.

Often brokers will also want to set-off where there is an Illegality or ATE. There is no specific reference to all Transactions being Affected Transactions but this is implied in any set-off provision by its nature:

  1. i.e., non-Defaulting Party or the non-Affected Party.