Template:M gen 2002 ISDA 8

Section 8(a)

One could have stopped after the first sentence, but it is a rare ISDA ninja that can help himself babbling. ISDA ninjas would make terrible used-car salespeople.

Why the ISDA Master Agreement feels the need to contemplate the discharge of obligations in one currency by payment of an amount in another — non-compliance with the clear terms of the contract in other words — we can only guess. The payer’s ability to plow this obverse furrow still depends on the payee’s good humour: the payee is not obliged to indulge the payer, but may, by converting the tendered amount into the Contractual Currency.

If there is a shortfall, the payer must pay it immediately — fair, since the payer is craving the recipient’s indulgence in the first place and is really courting a Failure to Pay or Deliver by his cavalier behaviour.

If there is an excess, the recipient must return it promptly — also fair, seeing as she didn’t ask to be paid in Brazilian Real, and had to go to all the trouble of converting it and faffing around at the FX counter at that little shop in the arcade near Liverpool Street.

Section 8(c)

So who even knew the things in Section 8(a) and 8(b) were indemnities?

They are, in the strict literal sense of an indemnity: a contractual promise to pay a sum of money (the difference between the amount paid in the Non-Contractual Currency and the actual amount owed in the Contractual Currency) in circumstances not (strictly) amounting to a breach; they are not in the popular (but misconceived) conception of an indemnity as some kind of all-conquering smart bomb.

Indemnity is one of the JC’s pet subjects. Get him started and that’s the evening gone.

Section 8(d)

So if your clottish counterparty can’t follow simple instructions and sends you Lire rather than Pesetas, and thereby fails to cover your loss, as long as you can prove what the exchange rate was at the time you would have exchanged it into the Contractual Currency, you can recover a loss, even if you didn’t.

Now this, to me, seems a little controversial. What if the exchange rate dropped through the floor, then recovered, and the Non-Affected Party held his nerve. Can he then cherry-pick?