Additional Termination Event - ISDA Provision

ISDA Anatomy™ →Go uptown In a Nutshell™ Section 5(b)(vi): 5(b)(vi) Additional Termination Event. If any “Additional Termination Event” is specified, the occurrence of that event (where the Affected Party will be as specified in the Confirmation or Schedule). view template 2002 ISDA full text of Section 5(b)(vi): 5(b)(vi) Additional Termination Event. If any “Additional Termination Event” is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties will be as specified for such Additional Termination Event in the Schedule or such Confirmation). view template Click here for the text of Section 5(b)(vi) in the 1992 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.

Numbering Discrepancy: Note the numbering discrepancy in Section 5(b) between the 1992 ISDA and 2002 ISDA. This is caused by a new 5(b)(ii) (Force Majeure Event) in the 2002 ISDA before Tax Event, which is thus shunted from Section 5(b)(ii) (in the 1992 ISDA) to Section 5(b)(iii) (in the 2002 ISDA).

ATEs are likely to be the most haggled-over part of your ISDA Master Agreement.

These are the other termination events your Credit department has dreamt up for this specific counterparty, that didn’t occur to the framers of the ISDA Master Agreement — or, at any rate, weren’t sufficiently universal to warrant being included in the ISDA Master Agreement for all. While the standard Termination Events tend to be “non-fault” events which justify termination of the relationship on economic grounds, but not on terms necessarily punitive to the Affected Party, Additional Termination Events are more “credity”, more susceptible of moral outrage, and as such more closely resemble Events of Default than Termination Events.

Examples

Common ones include:

• NAV triggers (for hedge funds)
• Key man provisions (for hedge funds)
• Investment manager insolvency or loss of licence
• Parent divestment (where counterparty is a financing subsidiary)

All they are cracked up to be?

There is a school of thought that this serves the interests of the Ancient Guild of Contract Negotiators and the Worshipful Company of Credit Officers more than it does the shareholders of the institutions for whom these people ply their trade, for in these days of zero-threshold CSAs, the real credit protections in the ISDA are the standard Events of Default (especially Failure to Pay or Deliver and Bankruptcy). It’s a fair bet no-one in the organisation will have kept a record of how often you pulled NAV trigger. It may well be never. “Ahh”, your credit officer will say, “but it gets the counterparty to the negotiating table”.

Hmmm.

Trick for young players

Termination Event is defined as “an Illegality, a Tax Event or a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event”.

Best Practice Note: Therefore adding any new Termination Event must ALWAYS be achieved by labelling it a new Additional Termination Event under Section 5(b)(vi), and not a separate event under a new Section 5(b)(vii) etc. If, you try to make it into a new “5(b)(vii)” it is therefore neither an “Illegality”, “Tax Event”, “Tax Event Upon Merger”, “Credit Event Upon Merger” nor an “Additional Termination Event”. Read literally, is will not be caught by the definition of “Termination Event” and none of the Termination provisions will bite on it.

I mention this because I have seen it happen. Yes, you can take a “fair, large and liberal view” that what the parties intended was to create an ATE, but why suffer that anxiety?