Illegality - 1992 ISDA Provision

1992 ISDA Master Agreement A Jolly Contrarian owner’s manual™ 5(b)(i) in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. You can even ask questions! Ask about it here. 5(b)(i) in all its glory 5(b)(i) Illegality. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party): 5(b)(i)(1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or 5(b)(i)(2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction; edit Related agreements and comparisons Related Agreements Click here for the text of Section 5(b)(i) in the 2002 ISDA Comparisons Click to compare this section in the 1992 ISDA and 2002 ISDA. Resources and Navigation Resources Wikitext | Nutshell wikitext | 2002 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA Navigation Preamble | 1 • (a) (b) (c) | 2 • (a) (b) (c) (d) (e) | 3 • (a) (b) (c) (d) (e) (f) | 4 • (a) (b) (c) (d) (e) | 5 • 5(a) Events of Default: 5(a)(i) Failure to Pay or Deliver 5(a)(ii) Breach of Agreement 5(a)(iii) Credit Support Default 5(a)(iv) Misrepresentation 5(a)(v) Default Under Specified Transaction 5(a)(vi) Cross Default 5(a)(vii) Bankruptcy 5(a)(viii) Merger Without Assumption 5(b) Termination Events: 5(b)(i) Illegality 5(b)(ii) Tax Event 5(b)(iii) Tax Event Upon Merger 5(b)(iv) Credit Event Upon Merger 5(b)(v) Additional Termination Event (c) | 6 • (a) (b) (c) (d) (e) | 7 | 8 • (a) (b) (c) (d) | 9 • (a) (b) (c) (d) (e) (f) (g) | 10 | 11 | 12 • (a) (b) | 13 • (a) (b) (c) (d) | 14 | Index: Click ᐅ to expand: 2002 ISDA 1992 ISDA Premium version of this page

Overview

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Summary

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An Illegality is a Section 5(b) Termination Event — being one of those irritating vicissitudes of life that are no-one’s fault but which mean things cannot go on, and not a Section 5(a) Event of Default, being those perfidious actions of one or other Party which bring matters to an end which, but for that behaviour, ought really to have been avoided.

Note also the impact of Illegality and Force Majeure on a party’s obligations to perform through another branch under Section 5(e), which in turn folds into the spectacular optional representation a party may make under 10(a) to state the blindingly obvious, namely that the law as to corporate legal personality is as is commonly understood by first-year law students. Who knows — maybe it is different in emerging markets and former Communist states?

For the silent great majority of swap entities for whom it is not, the curious proposition arises: what is the legal, and contractual, consequence of electing not to state the blindingly obvious? Does that mean it is deemed not to be true?

If the rules change, that is beyond your control, so it can’t be helped and hence Illegality is a Termination Event not an Event of Default. The 2002 ISDA develops the language of the 1992 ISDA to cater to insomniacs and paranoiacs but does not really add a great deal of substance.

An Illegality may only be triggered after exhausting the fallbacks and remedies specified in the ISDA Master Agreement.

Waiting Period

The point of Waiting Period is, for potential scenarios that might wind up justifying termination later, but you don’t yet know that, to build in a period to wait and see. For Illegality events (Section 5(b)(i)) is three Local Business Days — it is not so likely that an Illegality will sort itself out; for a Force Majeure Event (5(b)(ii) — where insh’Allah, things will come right and everyone can eventually go back to what they were doing, it is eight Local Business Days.

Waiting Periods — as defined in the ISDA Master Agreement also sometimes show up sometimes in other booklets — for example, ISDA’s Emissions Annex.

Through the good offices of Section 5(d), payments and deliveries which otherwise would be due during a Waiting Period are suspended.

1992 User Guide

Section 5(b)(i) provides that a Termination Event will occur if it becomes unlawful for a party (or if relevant its Credit Support Provider) to:

• make or receive a payment or delivery
• comply with any material provision of a 1992 ISDA or
• perform under a Credit Support Document.

The party to whom the Illegality has occurred will be the “Affected Party”. This Termination Event excludes breach by a party of its Section 4(b) obligation to maintain authorizations necessary under a 1992 ISDA or any Credit Support Document. Any such breach thus will be treated as an Event of Default and not an Illegality.

This Termination Event has been modified from the 1987 ISDA to refer to physically-settled transactions and to replace the reference to “Specified Entity” in the corresponding provision of the 1987 ISDA with “Credit Support Provider” because clause (2) of Illegality relates to Credit Support Documents.

Section 5(c) provides that an Event of Default with is also an Illegality will be treated as an Illegality.

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