Undead ISDA

ISDA Anatomy™ →Go uptown →intro →prem →sa 💥🆕💥 Audio version of this article 🎧 Listen to this podcast — on Spotify — on Substack Index: Click ᐅ to expand: Audio Essays Uh-oh: honey — did I check the residual Cross Default risk on that old 87 ISDA? Index: Click ᐅ to expand: ISDA Navigation 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: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • FM • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUSS • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM Early Termination 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations; Payment Date • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments 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 Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Undead
ˌʌnˈdɛd (n.)

A mythological being that occupies the netherworld between death and life; neither of the vital plane nor beyond the Styx; inert but yet not impotent: Nosferatu: an existence beyond the forest; of spectral but not corporeal energy.

The status of every defunct ISDA master agreement, once all Transactions have terminated. Neither alive nor dead but in a suspended inanimate state; disengaged but yet blooming with bacterial potential.

An ISDA reaches the same purgatorial state however its end time comes about: whether that be through the exigencies of a stressed close-out, or the beckoning lassitudinal entropy of our modern life or just a peculiar frame in which we grow bored, adversely regulated or we just lose interest and thereby give up on swaps.

Perhaps the attention simply wanders: we just let the last remaining Transactions roll off and scamper, free, into the fragrant meadows of oblivion and never set about planting any new ones.

But when our Transacting does come to an end — however it does — it leaves behind an extant rusting hulk: a dilapidating Master Agreement that attracts weeds, vermin, dope smokers, adolescents and other undesirables while at the same time leaching caustic toxins, salting the ground into a barren, desolate badland of financial misadventure.

No no-fault termination

There is no termination without fault on notice clause in the ISDA. It has no mechanism for a party unilaterally to finally close an ISDA Master Agreement down just because.

Now and then someone like Parsons, that pedantic oik from the credit department, will stop by your desk, eyes a-glitter, drop a sheaf upon it and casually impose upon you the burden of disposing of it. If, like JC, you find the credit department’s penchant for stupid notices irksome, you may be equally nonchalant in reply.

Parsons: I say, Molesworth, the H.O.D. asked if you would kindly do the honours to terminate this defunct ISDA.

Molesworth: What do you mean, “terminate this defunct ISDA”?

Parsons: (Affecting shock at the brazen display of ignorance) You know, send out a Section 6(g) notice or something. Whatever verbiage it is that you legal eagles do.

Molesworth: No.

Parsons: I beg your pardon?

Molesworth: Well, no. I’m afraid the answer is no.

For while you can terminate a Transaction under an ISDA Master Agreement — and all of them at once, if things come to that — none of the ISDA’s printed forms envisages the parties terminating the Master Agreement itself. Not even following a close-out. There are reasons for this, at least while the closeout process is on foot, and it is notoriously open-ended: If you terminate the whole agreement, not just the Transactions under it, then how are all those clever close out mechanics meant to work?

But these don’t apply to a non-stressed termination. You know, the nice, friendly, “well, I guess I’ll be on my way,” hasta mañana, parting-is-such-sweet-sorrow sort of staple of every finance contract.

ISDA is unique

Alone in the firmament of finance relationship contracts the ISDA Master Agreement has no general no-fault termination provisions. It cannot be unilaterally killed off. So, unless you and your counterparty can confect a means between you of putting the old bag down — and for that you will need the communion wine, garlic, wooden stakes and so on of consensus — a discarded ISDA arrangement will just lie there, locked-in, mute, transfixed, plastered to the infinite like some ghostly apparition, frozen at the event horizon of financial probity for ever — surviving, indefinitely, some say even beyond the mortal existence of they whose trading relationship it once described.

Some would say this is a trifle; a curio, sure, but ultimately a non-point: as unalive as the ISDA that presents it.

But it still unnerves those of delicate or superstitious mien. Like Parsons. For if it is still there, however immobile, can it not cause mass destruction through inattention?

Normally it does not matter

Mainly, no. For an ISDA Master Agreement under which there are no extant Transactions carries of itself no financial obligations or liabilities (we will get to Independent Amounts presently). An ISDA, without a Transaction, presents no risk''. It is as safe as a rusty Luger with the firing pin removed.

If no Transactions remain, there is nothing left one can close out or be closed out on, so what earthly concern is it, for either party, if notional non-payment obligations go unfulfilled?

What kind of paranoid weirdo would take the point that one’s continuing covenants — to send annual reports within three months of their publication, for example — are being broken? And what of those financial meta-obligations? That two-edged Cross Default clause? Could it ... ?

You may laugh, but note only this: they who so haughtily wave such trifles away yet still go quiet and dare not speak of the Dark Lord of the Swaps.

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See also

• Early Termination under the ISDA Master Agreement
• No-fault termination
• The Good Man
• The Dark Lord of the Swaps