Set-off - ISDA Provision

ISDA Anatomy™ →Go uptown 2002 ISDA 6(f) Set-Off. Any Early Termination Amount payable to one party (the “Payee”) by the other party (the “Payer”), in circumstances where there is a Defaulting Party or where there is one Affected Party in the case where either a Credit Event Upon Merger has occurred or any other Termination Event in respect of which all outstanding Transactions are Affected Transactions has occurred, will, at the option of the Non-defaulting Party or the Non-affected Party, as the case may be (“X”) (and without prior notice to the Defaulting Party or the Affected Party, as the case may be), be reduced by its set-off against any other amounts (“Other Amounts”) payable by the Payee to the Payer (whether or not arising under this Agreement, matured or contingent and irrespective of the currency, place of payment or place of booking of the obligation). To the extent that any Other Amounts are so set off, those Other Amounts will be discharged promptly and in all respects. X will give notice to the other party of any set-off effected under this Section 6(f). For this purpose, either the Early Termination Amount or the Other Amounts (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, in good faith and using commercially reasonable procedures, to purchase the relevant amount of such currency. If an obligation is unascertained, X may in good faith estimate that obligation and set off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained. Nothing in this Section 6(f) will be effective to create a charge or other security interest. This Section 6(f) will be without prejudice and in addition to any right of set-off, offset, combination of accounts, lien, right of retention or withholding or similar right or requirement to which any party is at any time otherwise entitled or subject (whether by operation of law, contract or otherwise). (view template) Index: Click ᐅ to expand: ISDA Navigation See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA. The Varieties of ISDA Experience Subject 2002 (wikitext) 1992 (wikitext) 1987 (wikitext) Preamble Pre Pre Pre Interpretation 1 1 1 Obligns/Payment 2 2 2 Representations 3 3 3 Agreements 4 4 4 EODs & Term Events 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • FM • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUSS • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM Early Termination 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations; Payment Date • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET Transfer 7 7 7 Contractual Currency 8 8 8 Miscellaneous 9 9 9 Offices; Multibranch Parties 10 10 10 Expenses 11 11 11 Notices 12 12 12 Governing Law 13 13 13 Definitions 14 14 14 Schedule Schedule Schedule Schedule Termination Provisions Part 1 Part 1 Part 1 Tax Representations Part 2 Part 2 Part 2 Documents for Delivery Part 3 Part 3 Part 3 Miscellaneous Part 4 Part 4 Part 4 Other Provisions Part 5 Part 5 Part 5 Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

2002 ISDA

Set-off in the 2002 ISDA borrows from the text used to build it into the 1992 ISDA (see below). This glorious provision appears in the box to the right. In a nutshell:

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set-off in a Nutshell™ _{(ISDA edition)}

6(f) An Innocent Party may, by notice, set-off any part of an Early Termination Amount payable by one party against any Other Amounts payable by the other under any other agreement, converting currencies if necessary and estimating unascertained obligations in good faith, but it must account for any difference between its estimate and the amount when it is finally ascertained.

view template

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This set-off provision still contains a rather elementary fluff. It imagines a world where the Early Termination Amount is payable one way, while all Other Amounts are payable in the other.

For example:

• Payer owes Payee an Early Termination Amount of 10
• Payee owes Payer Other Amounts of 50

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• Net: Payee owes Payer 40.

But what if there are Other Amounts payable the same way as the Early Termination Amount?

• Payer owes Payee an Early Termination Amount of 10
• Payer owes Payee Other Amounts of 40
• Payee owes Payer Other Amounts of 50

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• Net: Payee owes Payer 40.
• Whoops: Payee is still owed 40 by Payer so is an unsecured creditor

Not ideal. But fixable if you're prepare to add some dramatically anal language:

6(f) Set-Off. Any Early Termination Amount (or any other amounts whether or not arising under this Agreement, matured, contingent and irrespective of the currency, place of payment of booking of the obligation)” payable to one party (the “Payee”) by the other party (the “Payer”), ...

Cross-affiliate set-off

The 2002 ISDA’s Set-off provision refers to a “Payer” and “Payee”.

• Affiliates: Either the “Payer” or the “Payee” could be the innocent party, so including Affiliates into the 2002 Definition becomes problematic and cumbersome.

Generally, market practice is therefore to do the following:

• • Where Affiliates are required: to use bespoke wording.
  • Where Affiliates are not required: use the 2002 ISDA standard set-off wording above.

Scope of Set-off

The 2002 ISDA set-off wording allows set-off following an Event of Default, CEUM, or any other Termination Event where there is one Affected Party and all outstanding transactions are Affected Transactions.

Often brokers will also want to set-off where there is an Illegality or ATE. There is no specific reference to all Transactions being Affected Transactions but this is implied in any set-off provision by its nature:

• • If only some transactions are Affected Transactions and so only a portion of outstanding transactions are being terminated then there is an on-going relationship and unilateral set-off is not appropriate.
  • i.e., if you weren't terminating all Transactions, it would be drastic and counterproductive to a relationship to use a set-off.
• As such, the standard ISDA provision and the [Counterparty] provision are very similar in scope - the Tax Event and Tax Event Upon Merger provisions (those not caught by your wording) are more likely to only affect certain transactions and not all Transactions and therefore set-off is not likely to be relevant in such instances.
• Force Majeure: The 1992 ISDA contains no Force Majeure provision. Commercially, it is not likely that an ISDA would be closed-out as a result of a Termination Event as these are generally viewed as non-fault and set-off would generally not be relevant.

• Illegality does allow either party to terminate but this is limited to all Affected Transactions which may not result in a close-out of the entire ISDA. In fact, the definition used of Affected Transactions makes it clear that in the cases of Illegality, Tax Event Upon Merger or Tax Event then it will only be transactions affected by the Termination Event that are closed-out. In relation to ATEs and CEUM this will be all Transactions and so set-off is relevant.

1992 ISDA

The 1992 ISDA does not have a specific set off provision, although it manages to define Set-off, however:

Template:ISDA Master Agreement 1992 Set-off Definition ISDA published a provision in the Users Guide but several bespoke versions of a set-off provision developed and were used in the market. These often provided for the inclusion of Affiliates in relation to the Non-defaulting Party or Non-affected Party. It goes something like this:

“Set-off. Without affecting the provisions of the Agreement requiring the calculation of certain net payment amounts, all payments under this Agreement will be made without set-off or counterclaim; provided, however, that upon the designation of an Early Termination Date following an Event of Default, or a Termination Event under Section 5(b)(iv) or Section 5(b)(v), in addition to and not in limitation of any other right or remedy (including any right to set off, counterclaim, or otherwise withhold payment or any recourse to any Credit Support Document) under applicable law the Non-defaulting Party or non-Affected Party}} (in either case, “X”) may without prior notice to any person set off any sum or obligation (whether or not arising under this Agreement and whether matured or unmatured, whether or not contingent and irrespective of the currency, place of payment or booking office of the sum or obligation) owed by the Defaulting Party or Affected Party (in either case, “Y”) to X or any Affiliate of X against any sum or obligation (whether or not arising under this Agreement, whether matured or unmatured, whether or not contingent and irrespective of the currency, place of payment or booking office of the sum or obligation) owed by X or any Affiliate of X to Y and, for this purpose, may convert one currency into another at a market rate determined by X. If any sum or obligation is unascertained, X may ingood faith estimate that sum or obligation and set-off in respect of that estimate, subject to X or Y, as the case may be, accounting to the other party when such sum or obligation is ascertained. Nothing in this Agreement shall create or be deemed to create any charge under English law.”