|
|
| (13 intermediate revisions by the same user not shown) |
| Line 1: |
Line 1: |
| {{isdaanat|6(f)}} | | {{nman|isda|2002|6(f)}} |
| ==={{2002ma}}===
| |
| Set-off in the {{2002ma}} borrows from the text used to build it into the {{1992ma}} (see below) but still contains a rather [[:Category:Schoolboy error|elementary fluff]]. It imagines a world where the {{isdaprov|Early Termination Amount}} is payable one way, while ''all'' {{isdaprov|Other Amounts}} are payable the other.
| |
| | |
| For example:
| |
| *{{isdaprov|Payer}} owes Payee an {{ETA}} of 10
| |
| *{{isdaprov|Payee}} owes {{isdaprov|Payer}} {{isdaprov|Other Amounts}} of 50
| |
| ----
| |
| *Net: {{isdaprov|Payee}} owes {{isdaprov|Payer}} 40.
| |
| | |
| But what if there are {{isdaprov|Other Amounts}} payable ''the same way'' as the {{isdaprov|Early Termination Amount}}?
| |
| | |
| *{{isdaprov|Payer}} owes Payee an {{ETA}} of 10
| |
| *'''{{isdaprov|Payer}} owes Payee {{isdaprov|Other Amounts}} of 40'''
| |
| *{{isdaprov|Payee}} owes {{isdaprov|Payer}} {{isdaprov|Other Amounts}} of 50
| |
| ----
| |
| *Net: {{isdaprov|Payee}} owes {{isdaprov|Payer}} 40.
| |
| *'''''Whoops: {{isdaprov|Payee}} is still owed 40 by {{isdaprov|Payer}} so is an unsecured creditor '''''
| |
| | |
| Not ideal. But fixable if you’re prepare to add some dramatically anal language:
| |
| | |
| :{{isdaprov|6(f)}} {{isdaprov|Set-Off}}. Any {{isdaprov|Early Termination Amount}} ''(or any other amounts, whether or not arising under this {{isdaprov|Agreement}}, matured, contingent and irrespective of the currency, place of payment of booking of the obligation)” payable to one party (the “'''Payee'''”) by the other party (the “'''Payer'''”), ...}}
| |
| | |
| ===Cross-[[affiliate]] [[set-off]]===
| |
| The {{2002ma}}’s {{isdaprov|Set-off}} provision refers to a “Payer” and “Payee”.
| |
| *'''Affiliates''': Either the “{{isdaprov|Payer}}” or the “{{isdaprov|Payee}}” could be the innocent<ref>i.e., non-{{isdaprov|Defaulting Party}} or the non-{{isdaprov|Affected Party}}.</ref> party, so including {{isdaprov|Affiliates}} into the 2002 Definition becomes problematic and cumbersome.
| |
| | |
| Generally, market practice is therefore to do the following:
| |
| *'''Where {{isdaprov|Affiliate}}s ''are'' required''': to use bespoke wording.
| |
| *'''Where {{isdaprov|Affiliate}}s are ''not'' required''': use the {{2002ma}} standard {{isdaprov|set-off}} wording above.
| |
| | |
| ===Scope of Set-off===
| |
| The {{2002ma}} {{isdaprov|set-off}} wording allows set-off following an {{isdaprov|Event of Default}}, {{isdaprov|CEUM}}, or any other {{isdaprov|Termination Event}} where there is one {{isdaprov|Affected Party}} and '''''all''''' outstanding transactions are {{isdaprov|Affected Transaction}}s.
| |
| | |
| Often [[broker]]s will also want to set-off where there is an {{isdaprov|Illegality}} or {{isdaprov|ATE}}. There is no specific reference to all {{isdaprov|Transaction}}s being {{isdaprov|Affected Transaction}}s but this is implied in any set-off provision by its nature:
| |
| *If only some transactions are {{isdaprov|Affected Transactions}} and so only a portion of outstanding transactions are being terminated then there is an on-going relationship and unilateral set-off is not appropriate.
| |
| *i.e., if you ''weren't'' terminating all {{isdaprov|Transaction}}s, it would be drastic and counterproductive to a relationship to use a [[set-off]].
| |
| *As such, the standard [[ISDA]] provision and the {{Bank}} provision are very similar in scope - the {{isdaprov|Tax Event}} and {{isdaprov|Tax Event Upon Merger}} provisions (those not caught by your wording) are more likely to only affect certain transactions and not all Transactions and therefore set-off is not likely to be relevant in such instances.
| |
| *'''{{isdaprov|Force Majeure}}''': The {{1992ma}} contains no {{isdaprov|Force Majeure}} provision. Commercially, it is not likely that an [[ISDA]] would be closed-out as a result of a {{isdaprov|Termination Event}} as these are generally viewed as non-fault and set-off would generally not be relevant.
| |
| | |
| *'''{{isdaprov|Illegality}}''' does allow either party to terminate but this is limited to all {{isdaprov|Affected Transaction}}s which may not result in a [[close-out]] of the entire [[ISDA]]. In fact, the definition used of Affected Transactions makes it clear that in the cases of Illegality, Tax Event Upon Merger or Tax Event then it will only be transactions affected by the Termination Event that are closed-out. In relation to ATEs and CEUM this will be all Transactions and so set-off is relevant.
| |
| | |
| ==={{1992ma}}===
| |
| The {{1992isda}} does not have a specific set off provision, although it manages to define {{isdaprov|Set-off}}, however:
| |
| :{{clause|ISDA|Master Agreement|1992|Set-off Definition}}
| |
| ISDA published a provision in the [[Users Guide]] but several bespoke versions of a set-off provision developed and were used in the market. These often provided for the inclusion of '''{{isdaprov|Affiliate}}s''' in relation to the {{isdaprov|Non-defaulting Party}} or {{isdaprov|Non-affected Party}}. It goes something like this:
| |
| | |
| :<small>“'''{{isdaprov|Set-off}}'''. Without affecting the provisions of the {{isdaprov|Agreement}} requiring the calculation of certain net payment amounts, all payments under this {{isdaprov|Agreement}} will be made without [[set-off]] or counterclaim; provided, however, that upon the designation of an {{isdaprov|Early Termination Date}} following an {{isdaprov|Event of Default}}, or a {{isdaprov|Termination Event}} under Section {{isdaprov|5(b)(iv)}} or Section {{isdaprov|5(b)(v)}}, in addition to and not in limitation of any other right or remedy (including any right to set off, counterclaim, or otherwise withhold payment or any recourse to any {{isdaprov|Credit Support Document}}) under applicable law the {{isdaprov|Non-defaulting Party}} or {{isdaprov|non-Affected Party}}}} (in either case, “X”) may without prior notice to any person set off any sum or obligation (whether or not arising under this {{isdaprov|Agreement}} and whether matured or unmatured, whether or not contingent and {{f|irrespective}} of the currency, place of payment or booking office of the sum or obligation) owed by the {{isdaprov|Defaulting Party}} or {{isdaprov|Affected Party}} (in either case, “Y”) to X or any {{isdaprov|Affiliate}} of X against any sum or obligation (whether or not arising under this {{isdaprov|Agreement}}, whether matured or unmatured, whether or not contingent and {{f|irrespective}} of the currency, place of payment or booking office of the sum or obligation) owed by X or any {{isdaprov|Affiliate}} of X to Y and, for this purpose, may convert one currency into another at a market rate determined by X. If any sum or obligation is unascertained, X may in[[good faith]] estimate that sum or obligation and [[set-off]] in respect of that estimate, subject to X or Y, as the case may be, accounting to the other party when such sum or obligation is ascertained. Nothing in this {{isdaprov|Agreement}} [[shall]] create or be [[deem]]ed to create any [[charge]] under English law.”</small>
| |
2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
6(f) 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
6(f) Set-Off. Any Early Termination Amount payable to one party (the “Payee”) by the other party (the “Payer”), in circumstances where there is a Defaulting Party or where there is one Affected Party in the case where either a Credit Event Upon Merger has occurred or any other Termination Event in respect of which all outstanding Transactions are Affected Transactions has occurred, will, at the option of the Non-defaulting Party or the Non-affected Party, as the case may be (“X”) (and without prior notice to the Defaulting Party or the Affected Party, as the case may be), be reduced by its set-off against any other amounts (“Other Amounts”) payable by the Payee to the Payer (whether or not arising under this Agreement, matured or contingent and irrespective of the currency, place of payment or place of booking of the obligation). To the extent that any Other Amounts are so set off, those Other Amounts will be discharged promptly and in all respects. X will give notice to the other party of any set-off effected under this Section 6(f).
For this purpose, either the Early Termination Amount or the Other Amounts (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, in good faith and using commercially reasonable procedures, to purchase the relevant amount of such currency.
If an obligation is unascertained, X may in good faith estimate that obligation and set off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained.
Nothing in this Section 6(f) will be effective to create a charge or other security interest. This Section 6(f) will be without prejudice and in addition to any right of set-off, offset, combination of accounts, lien, right of retention or withholding or similar right or requirement to which any party is at any time otherwise entitled or subject (whether by operation of law, contract or otherwise).
|
Resources and Navigation
Index: Click ᐅ to expand:
|
|
Comparisons
Neither the 1987 ISDA not the 1992 ISDA has a specific set-off provision, although the 1992 manages to define Set-off anyway.
ISDA published a suggested set-off provision in the 1992 User’s Guide, but no-one liked it, and before long several home-made versions were percolating around the market. These often permitted set-off between the Innocent Party’s Affiliates and the non-performing party.
ISDA’s crack drafting squad™ got the hint and implemented a fully-fledged set-off provision based on this language into the 2002 ISDA — but not without a little boo-boo. As to which, read on —
Basics
One does not exercise a set-off right willy nilly. Unless one is, mutually, settlement netting (where on a given day I owe you a sum, you owe me a sum, and we agree to settle by one of us paying the other the difference) set-off is a drastic remedy which will be seen as enemy action. You would not do it, without agreement, to any client you expected to keep. So, generally, use set-off as a remedy it only arises following an event of default.
A bit of a bish in the 2002 ISDA
Set-off in the 2002 ISDA borrows from the text used to build it into the 1992 ISDA but still contains a rather elementary fluff-up: it imagines a world like our own, but where the Early Termination Amount is payable one way, while all Other Amounts are only payable the other. Life, as any fule kno, is not always quite that convenient.
For example:
But what if there are Other Amounts payable the same way as the Early Termination Amount?
Not ideal. But fixable if you’re prepared to add some dramatically anal language:
6(f) Set-Off. Any Early Termination Amount (or any other amounts, whether or not arising under this Agreement, matured, contingent and irrespective of the currency, place of payment of booking of the obligation)” payable to one party (the “Payee”) by the other party (the “Payer”), ...
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👇
|
See also
References