Potential Event of Default - ISDA Provision

2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: →’87 equivalent →’92 equivalent →’02 equivalent Potential Event of Default 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. Original text “Potential Event of Default” means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. 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 Resources and Navigation Index: Click ᐅ to expand: ISDA

Comparisons

See especially how the inclusion of Potential Event of Default makes the much talked-about, seldom understood Section 2(a)(iii) condition to payments far more sensitive than it has any right to be.

Basics

A Potential Event of Default is a Failure to Pay or Deliver, Breach of Agreement (or other Event of Default) with an unexpired grace period, or where the grace period has expired but the Non-defaulting Party hasn’t (yet) given a notice of default actually accelerating the default into an actual Event of Default.

That means, 2(a)(iii) defenders, that any formal breach of the ISDA Master Agreement, if notified by the Non-defaulting Party, renders the Section 2(a)(iii) conditions precedent unfulfilled, and means you can suspend performance of your obligations under all outstanding Transactions. I don’t make the rules, folks.

Actually, courtesy of that parenthetical “, or both,” it is worse even than that, though we think common courtesy (or at any rate, sense} would intervene to prevent non-notified formal breaches being acted upon. But not the literal terms of the ISDA: A formal breach — any non-compliance with its terms more grievous than a failure to provide tax certificates (that is specifically carved out) on commission suspends the other Party’s obligations until cured.

This is truly a custom more honoured in the breach than th’observance, and just as well: if ISDAs locked up every time a party was late with its annual Sox attestation only half the world’s swap financing would ever get paid.

Premium content Here the free bit runs out. Subscribers click 👉 here. New readers sign up 👉 here and, for ½ a weekly 🍺 go full ninja about all these juicy topics👇 JC’s “nutshell” summary of the clause Background reading and long-form essays Grace periods and notice requirements for each Event of Default - timing is everything Why no-one in their right mind would ever close out an ISDA for breach of agreement Grace periods and time being of the essence. Does this introduce a tension? Which gives Notice period convolution: beware of dirty pool from the negotiator community

See also

• Events of Default under the ISDA Master Agreement
• Grace period