Template:M detail 2002 ISDA 6(f)

Bespoke wording to capture affiliate set-off

If you are the “live-dangerously” sort who wants to capture cross-affiliate set off, try amending the first line of Section 6(f) to read as follows:

6(f) Set-Off. Any Early Termination Amount amounts, whether or not arising under this Agreement, matured, contingent and irrespective of their currency, place of payment or booking payable to one party or its Affiliates, if it is the Non-defaulting Party or Non-affected Party (the “Payee”) by the other party or its Affiliates, if it is the Non-defaulting Party or Non-affected Party (the “Payer”), 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, at the option of the Non-defaulting Party or the Non-affected Party, as the case may be (“X”) (and without prior notice to the Defaulting Party or the Affected Party, as the case may be), be reduced by its set-off against any other amounts (“Other Amounts”) payable by the Payee to the Payer (whether or not arising under this Agreement, matured or contingent and irrespective of the currency, place of payment or place of booking of the obligation).

From the prose stylist’s point of view this is quite the monstrous contraption. But the “ISDA way” leads us to this outcome.

So what are we trying to say here, and is there a better way of saying it?

Firstly, we are talking only about situations where there is a catastrophic, credit-induced close-out of the whole ISDA — one that precipitates the total breakdown of the relationship between the parties. In any other case neither party would use a mandatory set-off.

Secondly, the Innocent Party — the JC made this term up, by the way, but it is useful — is the one who is bringing its own Affiliate rights and liabilities into the frame for set-off. It cares not one whit for the Guilty Party, which is presently smoking hulk straddling the median strip, remember, much less any of its Affiliates (who are most likely similarly indisposed).

So how might we say this, given a fresh piece of paper?

6(f) Set-off: Following the designation of an Early Termination Date for all Transactions where there is one Innocent Party, that party may, by notice, set-off any Payables it owes against any Payables the other party owes the Innocent Party, converting currencies if necessary and estimating unascertained obligations in good faith, but accounting for any difference between its estimate and the amount when it is finally ascertained. In this clause:

“Innocent Party” means a Non-defaulting Party or a Non-affected Party, as the case may be and, when determining any Payables owed by or to such a party, includes its Affiliates.
“Payable” means any amount owed by the party in question, whether or not arising under this Agreement, matured or contingent and irrespective of its currency, place of payment or booking.