Template:M gen 2002 ISDA 5(b)(vi)

Trick for young players

There is no Section 5(b)(vii) of the 2002 ISDA, nor a Section 5(b)(vi) under the 1992 ISDA and nor should you make one.

A “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”. Therefore, adding any new Termination Event must ALWAYS be achieved by labelling it a new “Additional Termination Event” under Section 5(b)(vi) (under the 2002 ISDA) or 5(b)(v) (under the 1992 ISDA), and not a separate new Termination Event under a new Section 5(b)(vii), or anything like that.

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 Section 6(b) Right to Terminate following Termination Event 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, in our age of anxiety, why suffer that one?

Key person ATE

In a gaucher times called a key man, the key person — or people — are those in a small financial services organisation who provide the lion’s share of the brains and nowse. In a hedge fund, this means the two genius ex-Goldman trading whizz founding partners.

As long as these two chaps — they tend to be chaps, though the revolution is coming — still show up for work for their colossal paycheques, the future of the organisation is relatively assured. Should one of them or, God forbid both, gallivant off to their newly-acquired Caribbean islands to play with their respective collections of racing cars, they will leave behind a bunch of mediocre financial services hacks and bullshit artists with whom neither the fund’s erstwhile clients nor its trading counterparties will any longer wish to do business.

Hence the “key person clause”, entitling one to terminate a trading arrangement should the nominated key persons bugger off. If there is more than one nominated key person expect complications are around how many of them must leave before the clause can be triggered. Should it be all of them? Any of them? A simple majority?

Negotiating a key person clause can be a fascinating exercise. Here psychology conflicts with normal imperatives of risk management because, while key person clauses undoubtedly represent an Achilles heel for a hedge fund, they play so egregiously to the principals’ egos that most will be upset the not to be asked for one. There is no better validation of one’s self-worth, after all, than to be told that without your continued personal involvement a training relationship is worthless.