1987 ISDA Interest Rate and Currency Exchange Agreement: Difference between revisions
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Revision as of 18:46, 2 August 2016
Well and truly out of date version of the ISDA Master Agreement.
Replaced by the 1992 ISDA, and then the 2002 ISDA.
Differences between 1987 and 1992 Master Agreements
the 1992 ISDA was introduced principally, to:
- Expand range of products covered: Expand beyond interest rate derivatives and currency derivatives and promote the benefit of close-out netting
- Market Developments: Reflect legal developments between 1987 and 1992.
Significant Changes
- Physcial Delivery: Permits physical delivery
- Settlement Amounts: Introduices greater flexibility for determining Settlement Amounts upon termination of Transactions (the Loss, Market Quotation, First Method and Second Method regimes were introduced, subsequently refined by the 2002 ISDA into Close-out Amount).
- Two-Way Payments on Termination: Inder the 1987 ISDA a party may not receive termination payments (this is the "limited two-way payment" provision).
- Settlemnent netting: more flexibility for netting groups of transactions under Section 2 - under the 1987 ISDA you could either net just within single transactions or across all Transactions.
there are some others - a helpful guide can be found here
Close-out Netting under the 1987 ISDA
It can be done, but tread carefully: the somewhat agricultural Automatic Early Termination provision may cause problems. Generally speaking:
- Physical Settlement: given that the 1987 ISDA doesn't include physical delivery provisions, if you have any physically settled trades under it, you'd need to also add boilerplate language in the master to ensure the close-out mechanic worked for them, including consequential amendments to Sections 5 and 6 of the 1987 master.
- Bankruptcy and Automatic Early Termination: section 5(a)(vii) of the 1987 ISDA is loosely drafted and includes events which it may be difficult to determine with accuracy. (esp. subsections (2), (7), and (8). This would be okay, except for the way automatic early termination works under the 1987 ISDA:
- it happens by default (in the 1992 ISDA and subsequently it has to be elected, and only would be elected in those jurisdictions where it was needed to ensure close-out netting)
- it happens by reference to all of the limbs of the Bankruptcy definition, including those which are observable and definitive. AET shouldn't kick in simply where a party "takes steps in furtherance of" an insolvency filing - it should only happen at the point of that actual insolvency filing.
- That is to say the second sentence of Section 6(a) (see below) deems the occurrence of an Early Termination Date automatically upon the occurrence of any event falling within the Bankruptcy Event of Default.
By contrast, Automatic Early Termination under the 1992 ISDA and 2002 ISDA, if elected, does not apply to those events that are uncertain as to the precise time of their occurrence. Therefore, the enforceability of Automatic Early Termination in the 1992 ISDA and the 2002 ISDA cannot be called into question on the basis of the uncertainty created by the inclusion of the events in the 1992 ISDA and 2002 ISDA equivalent to those in the 1987 ISDA referred to above.
Relevant Provisions
- 5(a)(vii) Bankruptcy. The party or any applicable Specified Entity:–
- (1) is dissolved;
- (2) becomes insolvent or fails or is unable or admits in writing its inability generally to pay its debts as they become due;
- (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors;
- (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for the winding-up or liquidation of the party or any such Specified Entity, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition
- (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for the winding-up or liquidation of the party or such Specified Entity or
- (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof;
- (5) has a resolution passed for its winding-up or liquidation;
- (6) seeks or becomes subject to the appointment of an administrator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets (regardless of how brief such appointment may be, or whether any obligations are promptly assumed by another entity or whether any other event described in this clause (6) has occurred and is continuing);
- (7) any event occurs with respect to the party or any such Specified Entity which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (6) (inclusive); or
- (8) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts;
- other than in the case of clause (1) or (5) or, to the extent it relates to those clauses, clause (8), for the purpose of a consolidation, amalgamation or merger which would not constitute an event described in (viii) below; or
6(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the ‘‘Defaulting Party’’) has occurred and is then continuing, the other party may, by not more than 20 days’ notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Swap Transactions. However, an Early Termination Date will be deemed to have occurred in respect of all Swap Transactions immediately upon the occurrence of any Event of Default specified in Section 5(a)(vii)(1), (2), (3), (5), (6), (7) or (8) and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence of any Event of Default specified in Section 5(a)(vii)(4).
(view template)