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The process of closing out an ISDA following a {{{{{1}}}|Termination Event}} and not an {{{{{1}}}|Event of Default}}. There is a lengthy discussion of this here for our premium readers.

Among financing documents, The ISDA is — unique? Pioneering? Overcomplicated? — in having two types of event that can induce parties to call the whole thing off. Or parts of it.

That’s a part of the explanation: some things bring down only some transactions and not others.

Termination Events

Specific taxation and regulatory changes that affect only certain transactions or transaction types, that justify terminating those transactions, but not the whole kitten-caboodle.

And there are things that do justify bringing down the whole kitten-caboodle, but are no-one’s fault as such, just one of these regrettable things that life throws at us every now and then. Changes in tax or regulation that affect a counterparty, or both counterparties, meaning the ongoing trading relationship is not allowed, or is no longer economically efficient.

These events are “{{{{{1}}}|Termination Events}}”: they are complicated two ways: what is affected, and who is affected, which in turn determines who is entitled to call termination and, importantly calculate what is due, according to whose marks. In many cases it will be both parties, and there will be a splitting of the difference.

Events of Default

Then there are events that are someone’s “fault” — in a “banky” way: in that they generally indicate credit failure of some kind, and which necessarily bring down the whole shooting match, but only if the innocent party actually wants that. The close out calculations here are different, and a bunch of other funky ISDA tricks hang off these events too: notably the Section 2(a)(iii) flawed asset provision that allows the Non-Defaulting Party to shoulder arms and just sit there. This doesn’t apply to Termination Events, only Events of Default.

Additional Termination Events

Which leaves Additional Termination Events: bespoke events which parties negotiate into their Schedules, which behave like Termination Events despite in most cases being a lot more like Events of Default in their basic nature: they almost always address credit-impairment of some kind or other (NAV triggers, key person triggers and so on). {{Summ part {{{1}}}|5(a)}} {{Summ part {{{1}}}|5(b)}} {{Summ part {{{1}}}|5(c)}}