Undead ISDA

ISDA Anatomy™ →Go uptown Uh-oh: honey — did I check the residual Cross Default risk on that old 87 ISDA? 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.

The status of every defunct ISDA master agreement, once all transactions have terminated, whether through the exigencies of a stressed close-out, or simply through the entropy and general lassitude of a modern life in which many erstwhile ISDA devotees grew bored, or adversely regulated, and gave up on swaps, or just let the last remaining Transactions to roll off and scamper, free, into the fragrant meadows of oblivion, leaving the rusting hulk of a master agreement extant, dilapidating, attracting weeds, vermin and adolescent dope smokers and gradually leeching it's crumbling toxins into the soil.

Every now and then someone like Parsons, that pedantic oik from from credit, will stop by your desk, eyes a-glitter, drop a sheaf upon it and ask, casually, if you can do the necessary to terminate this defunct ISDA.

“You know, send out a 6(g) notice or something.”

If, like JC, you find the credit department’s penchant for stupid notices particularly irksome, you will enjoy composing and equally nonchalant reply.

“No”.
“I beg your pardon?”
“Well, no. I’m afraid the answer is, no.”

For while you can terminate a Transaction under an ISDA Master Agreement — and all of them at once, if things really come to that — none of its printed forms envisages the parties terminating the master agreement itself.

There is no contractual right to terminate on notice

Alone in the firmament of finance relationship contracts the ISDA Master Agreement has no general no-fault termination provisions. It cannot be unilaterally killed off. So, unless you and your counterparty can confect a means between you of putting the old bag down — and for that you will need the communion wine, garlic, wooden stakes and so on of consensus — a discarded ISDA arrangement will just lie there, locked-in, mute, transfixed, plastered to the infinite like some ghostly apparition, frozen at the event horizon of financial probity for ever — surviving, indefinitely, some say even beyond the mortal existence of they whose trading relationship it once described.

This unnerves those of delicate or superstitious mien. For if it is still there, however immobile, can it not cause mass destruction through inattention?

Normally it does not matter

Some would say this is a trifle ; a curio, but ultimately a non-point — as unalive as the ISDA that presents it. For an ISDA Master Agreement, under which there are no extant Transactions, of itself carries no financial obligations. It presents no risk. It is as safe as a rusty Luger with the firing pin removed.

If no Transactions remain that one can close out, what earthly concern is it, for either party, if notional non-payment obligations go unfulfilled? What kind of paranoid weirdo would take the point that one’s continuing covenants — to send annual reports within three months of their publication, for good example — are being broken? And what of those financial meta-obligations? That two-edged Cross Default clause? Could it ... ?

You may laugh, but note only this: they who so haughtily wave such trifles away yet still go quiet and dare not speak of the Dark Lord of the Swaps.

When it sort of does matter

JC is blessed with inquisitive m, thoughtful correspondents, and one recently raised this hypothetical:

What if I have posted a static, upfront Independent Amount under Credit Support Annex in the traditional fashion, not as an amount specifically tied to a transaction but an independent payment as collateral under the ISDA Master Agreement itself. How do I get that back, if I can’t terminate the ISDA)?

This is a very good, if theoretical, point. Well — JC thought it was technical: surely, no-one in this day and age demands genuinely independent Independent Amounts, do they? — but apparently they do. Swap dealers may, as consideration for even opening a credit line in the first place, before even trading upon it, ask prospective customers to deposit a wodge of cash or securities as general collateral. Particularly, we hear, with corporate and non-financial end users. It seems rather perverse, but there we have it.

Strictly, that cash is deposited under the CSA and not the ISDA proper — though that is a fine distinction indeed if the CSA counts as a Transaction under the ISDA Master Agreement and in any case the CSA form doesn't have any termination provisions either, so you are in the same place.

See also

• Early Termination under the ISDA Master Agreement
• No-fault termination
• The Good Man
• The Dark Lord of the Swaps