Automatic Early Termination - ISDA Provision: Difference between revisions
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{{isdaprov|AET}} is thus only triggered by ''certain'' events under the {{isdaprov|Bankruptcy}} [[Events of Default - ISDA Provision|event of default]] — formal bankruptcy procedures — and not by economic events that tend to indicate insolvency (such as an inability to pay debts as they fall due, [[technical insolvency]] or the exercise of security. Nor does it apply to other Events of Default. | {{isdaprov|AET}} is thus only triggered by ''certain'' events under the {{isdaprov|Bankruptcy}} [[Events of Default - ISDA Provision|event of default]] — formal bankruptcy procedures — and not by economic events that tend to indicate insolvency (such as an inability to pay debts as they fall due, [[technical insolvency]] or the exercise of security. Nor does it apply to other Events of Default. | ||
{{automaticearlytermination}} | {{automaticearlytermination}} | ||
===Typical, if [[tedious]], mostly harmless drafting tweaks=== | ===Typical, if [[tedious]], but mostly harmless drafting tweaks=== | ||
Even for the {{isdaprov|Non-Defaulting Party}}, [[AET]] is a necessary evil. It leaves the {{isdaprov|Non-Defaulting Party}} at risk of being un-hedged on a portfolio of {{isdaprov|Transaction}}s that automatically terminated effective as of a {{isdaprov|Bankruptcy}} event without the [[NDP]] knowing that the {{isdaprov|Bankruptcy}} event had happened<ref>Unless [[credit department]] is constantly monitoring the regulatory newswires of all AET counterparties to check whether they go bankrupt each day, and they won’t be.</ref>. The [[NDP]] may want to capture the [[market risk]] between the {{isdaprov|Bankruptcy}} event and the date on which they ''[[Constructive knowledge|should have]]'' known about it, and factor that into the {{isdaprov|Close-out Amount}}. If they do, expect to see language like the below. | Even for the {{isdaprov|Non-Defaulting Party}}, [[AET]] is a necessary evil. It leaves the {{isdaprov|Non-Defaulting Party}} at risk of being un-hedged on a portfolio of {{isdaprov|Transaction}}s that automatically terminated effective as of a {{isdaprov|Bankruptcy}} event without the [[NDP]] knowing that the {{isdaprov|Bankruptcy}} event had happened<ref>Unless [[credit department]] is constantly monitoring the regulatory newswires of all AET counterparties to check whether they go bankrupt each day, and they won’t be.</ref>. The [[NDP]] may want to capture the [[market risk]] between the {{isdaprov|Bankruptcy}} event and the date on which they ''[[Constructive knowledge|should have]]'' known about it, and factor that into the {{isdaprov|Close-out Amount}}. If they do, expect to see language like the below. | ||
Revision as of 09:19, 29 August 2019
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ISDA Anatomy™
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Automatic Early Termination is an odd and misunderstood concept which exists in Section 6(a) Right to Terminate Following Event of Default of the ISDA Master Agreement. As is so much in the ISDA Master Agreement, it’s all about Netting. Where a jurisdiction suspends terms of contracts in a period of formal insolvency, the idea is to have the ISDA break before that suspension kicks in — so close-out netting works.
AET is thus only triggered by certain events under the Bankruptcy event of default — formal bankruptcy procedures — and not by economic events that tend to indicate insolvency (such as an inability to pay debts as they fall due, technical insolvency or the exercise of security. Nor does it apply to other Events of Default. Template:Automaticearlytermination
Typical, if tedious, but mostly harmless drafting tweaks
Even for the Non-Defaulting Party, AET is a necessary evil. It leaves the Non-Defaulting Party at risk of being un-hedged on a portfolio of Transactions that automatically terminated effective as of a Bankruptcy event without the NDP knowing that the Bankruptcy event had happened[1]. The NDP may want to capture the market risk between the Bankruptcy event and the date on which they should have known about it, and factor that into the Close-out Amount. If they do, expect to see language like the below.
If you are an AET counterparty, your credit officer may bridle at the sight of this, but you can reassure her that at any point where this language comes into play she will be wandering around outside in a daze clutching an Iron Mountain box full of gonks, comedy pencils and deal tomb-stones, and contemplating a career reboot as a maths teacher, so she shouldn’t really care anyway.
- Adjustment for Automatic Early Termination: If an Early Termination Date occurs following an Automatic Early Termination event, the Early Termination Amount will adjusted to reflect movements in rates or prices between that Early Termination Date and the date on which the Non Defaulting Party should reasonably have become aware of the occurrence of the Automatic Early Termination.
Switzerland
Switzerland is — isn’t it always? — different, and a good place to go right now would be the Swiss bankruptcy language page. Switzerland itself is also a good place to go, especially in the skiing season. The JC loves Wengen.
AET under the 1987 ISDA
Note the somewhat difficult position for AET under the 1987 ISDA - a fuller discussion at that article - which was part of the reason for the move to the 1992 ISDA in the first place.
See also
References
- ↑ Unless credit department is constantly monitoring the regulatory newswires of all AET counterparties to check whether they go bankrupt each day, and they won’t be.