Template:Close out netting under 1987 isda

Close-out netting under the 1987 ISDA

It can be done, but tread carefully: the somewhat agricultural Automatic Early Termination provision may cause problems. Generally speaking:

• Physical settlement: given that the 1987 ISDA doesn’t include physical delivery provisions, if you have any physically settled trades under it, you’d need to add boilerplate language in the master to ensure the close-out mechanic worked for them.
• Bankruptcy and Automatic Early Termination: section 5(a)(vii) is loosely drafted and includes events which it may be difficult to determine with accuracy (esp. subsections (2), (7), and (8). This would be okay, except for the way Automatic Early Termination works under the 1987 ISDA:
  • it happens by default (by contrast, in the 1992 ISDA and 2002 ISDA it is an election, and you would only apply it to counterparties in those jurisdictions where it was needed to ensure close-out netting)
  • it happens by reference to all of the limbs of the Bankruptcy definition, including those which are observable and definitive. AET shouldn't kick in simply where a party "takes steps in furtherance of" an insolvency filing - it should only happen at the point of that actual insolvency filing.
  • That is to say the second sentence of Section 6(a) (see below) deems the occurrence of an Early Termination Date automatically upon the occurrence of any event falling within the Bankruptcy definition.

By contrast, Automatic Early Termination under the 1992 ISDA and 2002 ISDA does not apply to those events that are uncertain as to the precise time of their occurrence. Therefore, the enforceability of Automatic Early Termination in the 1992 ISDA and the 2002 ISDA cannot be called into question based on the uncertainty created by the inclusion of the events in the 1992 ISDA and 2002 ISDA equivalent to those in the 1987 ISDA referred to above.