Template:M gen 2018 CSD 13(h)

The alternatives

As-standard: a “designated Early Termination Date”

The as-standard Secured Party Rights Event in the 2018 English law IM CSD is the designation of an Early Termination Date in respect of all Transactions following an Event of Default but — unless designated as an “Access Condition” — not a normal Termination Event or an Additional Termination Event. For what it is worth, “Access Conditions” are a list of Termination Events and Additional Termination Events set out in Paragraph 13(e)(ii) for each of which one can opt — severally for each party — in your elections. What on earth ISDA’s crack drafting squad™ managed to achieve with such pointless, fine-grained optionality (other than a sumptuous lifestyle for the hoardes of legal eagles who will feast on client negotiations as a result) it is hard to say.

In any case, just as a piece of design this is cruddy: any event leading to the early termination of all outstanding Transactions, should count as a Secured Party Rights Event, since at that point you are off risk, right? And before you complain that this is too wide, since there may still be amounts undetermined, or not as yet due under those Transactions, well, yes: that is exactly why the Early Termination Date is the wrong trigger point in the first place.

Why do you need to appropriate initial margin before you know if you are actually owed anything?

Failing that: “Failure to Pay Early Termination Amount”

(Quick drafting point: this means that a party fails to pay its Early Termination Amount once it has been determined, not that there is an Early Termination Amount determined following only a Failure to Pay or Deliver Event of Default.) That being the case, this is — well, if it covered all Termination Events, would be — the obvious best choice: it means, beyond any doubt the counterparty really has failed, it really did owe something, and it really did fail to pay it.

Now you have all the justification you need to wade in and repossess your counterparty’s initial margin. Only, oddly — infuriatingly — it doesn’t capture finally determined Early Termination Amounts that were caused by non-Events of Default (the so-called “Access Conditions”). Why, since at this point you have failed to pay the amount, and? Search me, readers.

Failing that: “Control Agreement Secured Party Rights Events”

If you have chosen to designate in your Control Agreement what the Secured Party’s rights to possess collateral are, then that applies, and overrides any of the disastrous trainwreck we have just picked through above.

Cutting through the nonsense

For those who don’t trust Control Agreements to do what they say on the tin, consider this kind of wording:

“Secured Party Rights Event” means that, following the occurrence or designation of an Early Termination Date with respect to all outstanding Transactions, an Early Termination Amount payable by the Chargor has been determined and notified to the Chargor under Section 6(d), and the Chargor has not paid it in full when due under Section 6(d)(ii).