Template:No termination events

The ISDA Master Agreement is rare amongst the beasts and fowls of the financial services hedgerows in that it has two categories of things that can lead to termination with extreme prejudice: Events of Default and Termination Events.

Briefly, Events of Default are “good-night, nurse” events — Failure to Pay, Bankruptcy, Breach of Agreement, Cross Default, Credit Support Default, DUST and so on — where it’s all over red rover and by morning time operations folks will be wandering blearily around outside the building clutching Iron Mountain boxes and kicking themselves for not joining that crypto start up six months ago, like everyone else in the service line did.

Termination Events are lesser, survivable things that just mean a few Transactions get scotched, or sometimes all of them, but in any case no reason we can’t pick ourselves up, dust ourselves off and get on with the business of trading again. They may grounds to terminate an ISDA Master Agreement but do not speak to the moral character or unacceptable creditworthiness of the Affected Party (so labelled — “affected”, in the sense of “a bit eccentric” — as opposed to a “Defaulting Party”, who is such a turpitudinous wretch).

So an Illegality, a Force Majeure, a Tax Event, a Tax Event Upon Merger or a Credit Event Upon Merger — all these things speak to the motion of vengeful gods above our mortal heads; seismic changes beyond our gift or capacity to control, and for whose provenance we can’t roundly be blamed.

There again, Additional Termination Events — that category of “other stuff” thrown in for good measure by the credit department, and which are assured to foul up your negotiation for months — these are more naughty in their bearing, and “defaulty” — but they still roll like Termination Events.

There are some subtle differences between how closeouts are priced depending on what caused them: in a nutshell Termination Events tend to be more “mid-markety” reflecting their “shit happens” vibe; Events of Default tend to be priced at the Non-Defaulting Party’s side of the market to acknowledge the sanctimony with which an innocent derivative party garlands itself.

There may have been a good reason for this in 1987 when the distinction first arose; we suspect these are less compelling and if ISDA’s crack drafting squad™ had its time again and was framing a derivatives master agreement from scratch we like to think it would be simpler affair. We also like to think that one day there will be peace in the middle east, and that we will live out a long retirement in a large villa overlooking the Lauterbrunnen valley, of course.

Most of the other industry master agreements don’t make that distinction: it’s an event of default or it isn’t, the ’squad’s brand of pinhead-dancing is of little moment and is scarcely to be encouraged (but let a creative credit officer loose on it, and you’ll be amazed what she can come up with). A repo is a repo is a repo. Likewise, really for a stock loan. But the term, volatility and net exposure one can generate under an ISDA Master Agreement make them a little special.

And we all like to feel a little special sometimes, don’t we?