2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
9(h) in a Nutshell™
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Original text
9(h). Interest and Compensation.
9(h)(i) Prior to Early Termination. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction:―
- (1) Interest on Defaulted Payments. If a party defaults in the performance of any payment obligation, it will, to the extent permitted by applicable law and subject to Section 6(c), pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as the overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment (and excluding any period in respect of which interest or compensation in respect of the overdue amount is due pursuant to clause (3)(B) or (C) below), at the Default Rate.
- (2) Compensation for Defaulted Deliveries. If a party defaults in the performance of any obligation required to be settled by delivery, it will on demand (A) compensate the other party to the extent provided for in the relevant Confirmation or elsewhere in this Agreement and (B) unless otherwise provided in the relevant Confirmation or elsewhere in this Agreement, to the extent permitted by applicable law and subject to Section 6(c), pay to the other party interest (before as well as after judgment) on an amount equal to the fair market value of that which was required to be delivered in the same currency as that amount, for the period from (and including) the originally scheduled date for delivery to (but excluding) the date of actual delivery (and excluding any period in respect of which interest or compensation in respect of that amount is due pursuant to clause (4) below), at the Default Rate. The fair market value of any obligation referred to above will be determined as of the originally scheduled date for delivery, in good faith and using commercially reasonable procedures, by the party that was entitled to take delivery.
- (3) Interest on Deferred Payments. If:―
- (A) a party does not pay any amount that, but for Section 2(a)(iii), would have been payable, it will, to the extent permitted by applicable law and subject to Section 6(c) and clauses (B) and (C) below, pay interest (before as well as after judgment) on that amount to the other party on demand (after such amount becomes payable) in the same currency as that amount, for the period from (and including) the date the amount would, but for Section 2(a)(iii), have been payable to (but excluding) the date the amount actually becomes payable, at the Applicable Deferral Rate;
- (B) a payment is deferred pursuant to Section 5(d), the party which would otherwise have been required to make that payment will, to the extent permitted by applicable law, subject to Section 6(c) and for so long as no Event of Default or Potential Event of Default with respect to that party has occurred and is continuing, pay interest (before as well as after judgment) on the amount of the deferred payment to the other party on demand (after such amount becomes payable) in the same currency as the deferred payment, for the period from (and including) the date the amount would, but for Section 5(d), have been payable to (but excluding) the earlier of the date the payment is no longer deferred pursuant to Section 5(d) and the date during the deferral period upon which an Event of Default or Potential Event of Default with respect to that party occurs, at the Applicable Deferral Rate; or
- (C) a party fails to make any payment due to the occurrence of an Illegality or a Force Majeure Event (after giving effect to any deferral period contemplated by clause (B) above), it will, to the extent permitted by applicable law, subject to Section 6(c) and for so long as the event or circumstance giving rise to that Illegality or Force Majeure Event continues and no Event of Default or Potential Event of Default with respect to that party has occurred and is continuing, pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as the overdue amount, for the period from (and including) the date the party fails to make the payment due to the occurrence of the relevant Illegality or Force Majeure Event (or, if later, the date the payment is no longer deferred pursuant to Section 5(d)) to (but excluding) the earlier of the date the event or circumstance giving rise to that Illegality or Force Majeure Event ceases to exist and the date during the period upon which an Event of Default or Potential Event of Default with respect to that party occurs (and excluding any period in respect of which interest or compensation in respect of the overdue amount is due pursuant to clause (B) above), at the Applicable Deferral Rate.
- (4) Compensation for Deferred Deliveries. If:―
- (A) a party does not perform any obligation that, but for Section 2(a)(iii), would have been required to be settled by delivery;
- (B) a delivery is deferred pursuant to Section 5(d); or
- (C) a party fails to make a delivery due to the occurrence of an Illegality or a Force Majeure Event at a time when any applicable Waiting Period has expired,
- the party required (or that would otherwise have been required) to make the delivery will, to the extent permitted by applicable law and subject to Section 6(c), compensate and pay interest to the other party on demand (after, in the case of clauses (A) and (B) above, such delivery is required) if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement.
9(h)(ii) Early Termination. Upon the occurrence or effective designation of an Early Termination Date in respect of a Transaction:―
- 9(h)(ii)(1) Unpaid Amounts. For the purpose of determining an Unpaid Amount in respect of the relevant Transaction, and to the extent permitted by applicable law, interest will accrue on the amount of any payment obligation or the amount equal to the fair market value of any obligation required to be settled by delivery included in such determination in the same currency as that amount, for the period from (and including) the date the relevant obligation was (or would have been but for Section 2(a)(iii) or 5(d)) required to have been performed to (but excluding) the relevant Early Termination Date, at the Applicable Close-out Rate.
- 9(h)(ii)(2) Interest on Early Termination Amounts. If an Early Termination Amount is due in respect of such Early Termination Date, that amount will, to the extent permitted by applicable law, be paid together with interest (before as well as after judgment) on that amount in the Termination Currency, for the period from (and including) such Early Termination Date to (but excluding) the date the amount is paid, at the Applicable Close-out Rate.
9(h)(iii) Interest Calculation. Any interest pursuant to this Section 9(h) will be calculated on the basis of daily compounding and the actual number of days elapsed.
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Comparisons
There is no strict equivalent to Section 9(h) in the 1992 ISDA. But see Section 2(e), which is a half-arsed attempt at the same thing.
Friends of the JC will know that “half-arsed” isn’t always bad, of course — it can be quite good, in fact — characterising, as it does, the sum total of the JC’s paltry achievements on this barren rock — and in any case, it leaves something to the imagination and we all like a little private intellectual space to indulge our whims and fantasies every now and then, don’t we?
As you step through this monstrosity, going to town on devilish details as it does, you may find it leads you directly into the “I’m sorry I asked” file.
Are you sorry yet? Well, you did ask.
Basics
Section 9(h) deals with the various scenarios where interest — over and above the amounts stated to be payable as Fixed Rate and Floating Rate Options under a given Transaction — might apply to deferred and delayed payments under the ISDA.
Those scenarios are:
Payment default: Someone fails to pay money under a Transaction when they are meant to.
Delivery default: Someone fails to deliver a non-money asset under a Transaction when they are meant to.
Non-default deferral: Some other externality intervenes to make payment impossible, which does not amount to default: a market disruption, a Force Majeure Event, a forced suspension of obligations for reasons beyond the control or fault of either party.
The innocent and the damned
In that magically over-complicated way that is the blast signature of ISDA’s crack drafting squad™, the interest rate that applies to delinquency differs depending on the reason for it; the more “at fault” a party is, the more punitive the rate.
“Innocent” deferrals attract a rate called the Applicable Deferral Rates. The more punitive one are called Default Rates. (This, by the way, is one of the significant “upgrades” from the 1992 ISDA, which had a rather half-hearted penalty interest provision in Section 2(e)).
Assets versus cash
Also, the calculation basis is more complicated if the deferral involves the delivery of an asset since you need a way of figuring out the market value of the asset on which interest can be said to accrue.
Waiting periods
And since one kind of deferral can morph into another — upon the expiry of a Waiting Period, for example — the exact computation of deferrals is fraught. You might even think that the ’squad’s quest for infinite exactitude in a scenario which in many cases will include a bankrupt debtor who isn’t going to pay you much of what you are owed in any case, is a bit overdone. We couldn’t possibly comment.
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- More on Default Rates
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See also
References