Flawed asset

You'll be most likely wanting to see the discussion on this wonderfully baffling subject under Section 2(a)(iii) of the ISDA Master Agreement. More generally, following an event of default, this concept allows an innocent, but out-of-the-money, party to a derivative or securities finance transaction to suspend performance of its obligations without terminating the transaction and thereby crystallising a mark-to-market loss. Section ===Section 2(a)(iii) litigation=== There is a (generous) handful of important authorities on the effect under English law or New York law of the suspension of obligations under the most litigationey clause in the ISDA Master Agreement, Section 2(a)(iii). They consider whether flawed asset provision amounts to an “ipso facto clause” under the US Bankruptcy Code or violates the “anti-deprivation” principle under English law. Those cases are:

• Lomas v Firth Rixson
• Marine Trade v Pioneer
• Pioneer v Cosco
• Pioneer v TMT
• Enron v TXU
• Metavante v Lehman entered the argot in a simpler, more peaceable time, when zero threshold, daily margined CSAs were an uncommon, rather fantastical sight. They're more or less obligatory now, so it's hard to see the justification for a flawed asset provision.

Master trading agreements

• ISDA Master Agreement: You can find it all, in gruesome detail, in the article on Section 2(a)(iii). The ISDA provision has generated some case law, including Metavante, and Firth Rixson, which the truly insatiable amongst you may care to read.
• 2010 GMSLA: As far as I can see there is no 2(a)(iii) equivalent in the GMSLA. Nor would you expect one. It makes little ense in a master agreement for transactions that generally have zero or short tenors, and are inherently margined daily as a matter of course – i.e., there is no “uncollateralised, large, out-of-the-money exposures” an innocent stock lender would want to protect such a flawed asset provision.
• 2010 GMSLA: Now here's the funny thing. Even though the GMRA is comparable to the GMSLA in most meaningful ways, it does have a flawed asset provision. I don't understand it, but that is true about much of the world of international finance.

ISDA Anatomy™ →Go uptown {{{2}}} 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.