Potential Event of Default - ISDA Provision: Difference between revisions

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{{isdaanat|Potential Event of Default}}A failure to pay with an unexpired [[grace period]], or where the [[grace period]] has expired but the {{isdaprov|Non-defaulting Party}} hasn’t (yet) given a notice of default actually [[Accelerate|accelerating]] the default into an actual {{isdaprov|Event of Default}}.
{{nman|isda|2002|Potential Event of Default}}

Latest revision as of 12:22, 30 April 2024

2002 ISDA Master Agreement

A Jolly Contrarian owner’s manual™

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: FTPDBreachCSDMisrepDUSTCross DefaultBankruptcyMWA Termination Events: IllegalityFMTax EventTEUMCEUMATE 5 Events of Default: FTPDBreachCSDMisrepDUSTCross DefaultBankruptcyMWA Termination Events: IllegalityTax EventTEUMCEUMATE 5 Events of Default: FTPDBreachCSDMisrepDUSSCross DefaultBankruptcyMWA Termination Events: IllegalityTax EventTEUMCEUM
Early Termination 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculations; Payment DatePayments on ETSet-off 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculationsPayments on ETSet-off 6 Early Termination: ET right on EODET right on TEEffect of DesignationCalculationsPayments 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 to expand:

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
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  • 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

References