Template:M gen 2002 ISDA 5(a)(v)

Acceleration, not Default

DUST is triggered by an acceleration following an event of default under the Specified Transaction, not upon the default itself. Since the Specified Transaction is between you and the other party to the ISDA Master Agreement, there is no great loss — it is within your gift to accelerate the other contract — and to achieve set-off you would have to do so anyway.

This is less drastic than the corresponding Cross Default provision, which imports all the Events of Default from all Specified Indebtedness into the present one, even if the counterparty to the defaulted contract has itself waived its rights to exercise.

Default under any Specified Transaction, and the question of overreach

DUST attaches to a “default” (not defined) under any Specified Transaction, and not 'all Specified Transactions. This is a little given the avowed intent of DUST, which is to address credit concerns. If you have a credit concern with a counterparty under a derivative-like master agreement, you are hardly likely to be closing out some, but not other Transactions. You’ll be closing out the lot.

There are some types of Specified Transaction — notably stock loans — where “default”, in the wider sense of “not performing delivery obligations when due”, are a common experience in the market, as a result of operational settlement failures, and don’t have any particular credit content. Indeed the 2010 GMSLA’s concept of mini close-out addresses exactly this contingency: your counterparty has suffered a settlement glitch, you want to close-out the transaction and buy in your counterparty so you can cover your own onward delivery obligations, but there is no suggestion your counterparty is nose-diving into the side of a hill. Indeed, the mini-closeout is explicitly described as being not an Event of Default. This is why Section 5(a)(v)(3) failure to deliver' references all Transactions, while a Section 5(a)(v)(1) failure to pay does not.

So we have a lot of sympathy with the point, pedantic though it may be, that the DUST formulation is wider than it needs to be. An amendment to the following effect wouldn’t be out of the question:

References in section 5(a)(v)

Final payments

The reason for the second limb of the definition is to catch final payments, which can’t be accelerated, since they’re already due.

Differences between cross default and DUST

Ideally, cross default and DUST should be mutually exclusive. They are meant to dovetail with each other, not cross over. This will not stop mission creep from over-zealous credit departments, who will try to expand the scope of each, leading to all kinds of cognitive dissonances and righteous indignation from the counterparty’s negotiator. As ammunition for your fruitless attempts to persuade the credit department to live in the real world for once, try these:

• Cross default generally references indebtedness where the exercising counterparty has significant loan-type exposure to the defaulter; DUST references bilateral derivative and trading transactions which tend not to be in the nature of indebtedness (it is true to say that the line between these can be gray, especially in the case of uncollateralised derivative relationships;
• Cross default is only triggered once a certain threshold amount of indebtedness is defaulted upon; DUST is triggered upon any breach;
• Cross default references your Counterparty owes to a third party outside your control; DUST references other obligations your counterparty owes you or an affiliate you can reasonably be expected to be in league with. (ie you can't generally trigger if your counterparty defaults on Specified Transactions it has on with third parties)
• DUST only comes about if the Specified Transaction in question has been actually accelerated, whereas cross default is available whether the primary creditor has accelerated or not. (A cross default which requires acceleration is called “cross acceleration”.)