Template:M summ 2002 ISDA 9(h)

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.