Template:M comp disc 1992 ISDA 2(e)

Section 2(e) covers that netherworld between when a party defaults on its obligations under a Transaction and when (and if)the other, innocent, party closes that Transaction out.

Now, you might think this would of necessity be a short period — if the other guy is in default I am hardly going to sit around and do nothing, am I? — but a swap transaction isn’t like a normal lending transaction, the innocent party might be significantly out of the money on the Transaction, and therefore quite happy to to do nothing, particularly since, as long as the default is continuing, Section 2(a)(iii) suspends that party’s own payment and delivery obligations under the Transaction indefinitely.

Note the difference between a defaulted payment obligation and a defaulted delivery obligation: payments have a fairly anal penalty interest accrual regime; deliveries are left up to the parties to agree for themselves in the Schedule. This, in the JC’s unsolicited opinion, is a bit wet on ISDA’s part: a delivery obligation (usually of a tradable security or commodity) clearly has an observable market value as of its due delivery date. It is hard to see why interest could not accrue on that notional value. But anyway.