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| {{isdacomparison}}{{isdaanat|5(b)(i)}} | | {{nman|isda|2002|Illegality}} |
| ==1992 User Guide==
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| Section 5(b)(i) provides that a {{isdaprov|Termination Event}} will occur if it becomes unlawful for a party to make a payment or delivery or receive a payment or delivery or comply with any material provision of a 1992 Agreement or it becomes unlawful for a party or a {{isdaprov|Credit Support Provider}} to perform under a Credit Support Document. The party in respect of which the Illegality has occurred will be the Affected Party. This Termination Event excludes any event which results from a breach by a party of the agreement in Section 4(b) to maintain authorizations necessary in connection with a 1992 Agreement or any Credit Support Document. Any such breach thus will be treated as an Event of Default and not an Illegality.
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| This {{isdaprov|Termination Event}} has been modified from the 1987 Agreement to make reference to transactions that settle by physical delivery and to replace the reference to “{{isdaprov|Specified Entity}}” in the corresponding provision of the 1987 Agreement with “{{isdaprov|Credit Support Provider}}” because clause (2) of {{isdaprov|Illegality}} relates to {{isdaprov|Credit Support Document}}s.
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| Section 5(c) of the 1992 Agreements addresses the case where an Event of Default occurs that also constitutes an Illegality by providing that such a case will be treated as an Illegality.
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| ==2002 User Guide==
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| {{isdaprov|Illegality}}. Section 5(b)(i) provides that a {{isdaprov|Termination Event}} will occur if (after a {{isdaprov|Transaction}} is entered into and other than due to any action taken by a party or, if applicable, its {{isdaprov|Credit Support Provider}} or a breach by the party of its obligations under Section 4(b)) it becomes unlawful under any applicable law (i) for the {{isdaprov|Office}} through which a party makes and receives payments or deliveries with respect to such {{isdaprov|Transaction}} to make or receive a payment or 4 The two Tax-related {{isdaprov|Termination Event}}s are addressed in Section IV below.
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| 16 delivery under such {{isdaprov|Transaction}} or to comply with any material provision of the {{2002ma}} with respect to such {{isdaprov|Transaction}}; or (ii) for a party or its {{isdaprov|Credit Support Provider}} to perform under a {{isdaprov|Credit Support Document}} (whether to make or receive a payment or delivery or to comply with any other material provision of such {{isdaprov|Credit Support Document}}). {{isdaprov|Illegality}}, like {{isdaprov|Force Majeure Event}} (see Section II.F.3.b.below) but unlike other {{isdaprov|Termination Event}}s, is anticipatory in that it may be triggered if it would be unlawful to make a payment or delivery or to comply on a day if the relevant payment, delivery or compliance were required on that day, even if no such payment, delivery or compliance is in fact required on that day. The party in respect of which the {{isdaprov|Illegality}} has occurred will be the {{isdaprov|Affected Party}} (although both parties could be Affected Parties depending on the circumstances).
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| Where performance under a {{isdaprov|Transaction}} is concerned, note that, by focusing on the ability of a party’s {{isdaprov|Office}} through which it makes and receives payments or deliveries with respect to such {{isdaprov|Transaction}} to perform, an {{isdaprov|Illegality}} could still occur despite the fact that the party may be able to satisfy its obligations by making or receiving a payment or delivery through another of its {{isdaprov|Office}}s. In the {{1992ma}}, {{isdaprov|Illegality}} focused simply on the ability of “a party” to perform.
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| It is important to note that an {{isdaprov|Illegality}}, like a {{isdaprov|Force Majeure Event}}, may only be triggered after giving effect to any applicable provision, disruption fallback or remedy specified in a {{isdaprov|Confirmation}} or elsewhere in the {{2002ma}}. For example, if the parties have incorporated the {{isdadefs|1998|FX and Currency Option}} or the {{isdadefs|2002|Equity Derivatives}} in the relevant {{isdaprov|Confirmation}}, any applicable disruption events and related fallbacks in these definitional booklets will be given effect and there may be no role for the {{isdaprov|Illegality}} (or {{isdaprov|Force Majeure Event}}) {{isdaprov|Termination Event}}. If, however, the applicable fallbacks, if any, do not resolve the problem, {{isdaprov|Illegality}} (or {{isdaprov|Force Majeure Event}}) may come into play. In view of the anticipatory nature of {{isdaprov|Illegality}} (and {{isdaprov|Force Majeure Event}}), these types of fallbacks may not, under the terms of the {{isdaprov|Confirmation}} for the {{isdaprov|Transaction}}, in fact apply at the time a party believes an {{isdaprov|Illegality}} (or a {{isdaprov|Force Majeure Event}}) has occurred.
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| The obligation of the {{isdaprov|Affected Party}} under the {{1992ma}} to use all reasonable efforts to transfer Affected {{isdaprov|Transaction}}s in order to avoid the occurrence of the {{isdaprov|Termination Event}} is not included in the {{2002ma}}. Deferral of payments and deliveries after an {{isdaprov|Illegality}} occurs is discussed in Section II.F.3.b.1. below.
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| ==Illegality vs. Force Majeure==
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| Note that under the 2002, {{isdaprov|Illegality}} trumps {{isdaprov|Force Majeure}}. Given that Illegality is no longer subject to the "two Affected Parties" delay on termination (as it was in the {{1992ma}}, this is significant.
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| {{sa}}
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| *{{isdaprov|Transaction}}
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| *{{isdaprov|Affected Party}}
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| *{{isdaprov|Credit Support Provider}}
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| *{{isdaprov|Credit Support Document}}
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Latest revision as of 16:55, 14 August 2024
2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
Illegality in a Nutshell™
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Original text
- 5(b)(i) Illegality. After giving effect to any applicable provision, disruption fallback or remedy specified in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement, due to an event or circumstance (other than any action taken by a party or, if applicable, any Credit Support Provider of such party) occurring after a Transaction is entered into, it becomes unlawful under any applicable law (including without limitation the laws of any country in which payment, delivery or compliance is required by either party or any Credit Support Provider, as the case may be), on any day, or it would be unlawful if the relevant payment, delivery or compliance were required on that day (in each case, other than as a result of a breach by the party of Section 4(b)):―
- 5(b)(i)(1) for the Office through which such party (which will be the Affected Party) makes and receives payments or deliveries with respect to such Transaction to perform any absolute or contingent obligation to make a payment or delivery in respect of such Transaction, 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) for such party or any Credit Support Provider of such party (which will be the Affected Party) to perform any absolute or contingent obligation to make a payment or delivery which such party or Credit Support Provider has under any Credit Support Document relating to such Transaction, to receive a payment or delivery under such Credit Support Document or to comply with any other material provision of such Credit Support Document;
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Resources and Navigation
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Comparisons
Redlines
Discussion
Quite a lot of formal change to the definition of Illegality; not clear how much of it makes all that much practical difference. The 2002 ISDA requires you to give effect to remedies or fallbacks in the Confirmation that might take you out of Illegality before evoking this provision — which ought to go without saying. It also carves out Illegalities caused by the action of either party, which also seems a bit fussy, and throws in some including-without-limitation stuff which, definitely is a bit fussy. Lastly, the 2002 ISDA clarifies that the party suffering the Illegality is the Affected Party, and that an Illegality applies to the non-receipt of payments just as much as to their non-payment. Again, all this ought to have been true the 1992 ISDA — no doubt there is some whacky litigation that said otherwise — so this is mainly in the service of avoiding doubt.
Waiting period
There is no “Waiting Period” in the 1992 ISDA or in the 1987 ISDA. ISDA’s crack drafting squad™ introduced it in the 2002 ISDA with the arrival of Force Majeure, and liked it so much they extended it to Illegality.
Basics
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.
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See also
References