Potential Event of Default - ISDA Provision

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2002 ISDA Master Agreement
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[[{{{1}}} - 1992 ISDA Provision|This provision in the 1992]]

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Definition of Potential Event of Default in a Nutshell

Use at your own risk, campers!
Potential Event of Default” means an event which, with the giving of notice or the passing of time, would be an Event of Default.

Full text of Definition of Potential Event of Default

Potential Event of Default” means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default.

Related agreements and comparisons

Click here for the text of Section Potential Event of Default in the 1992 ISDA
Template:Isdadiff Potential Event of Default

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Content and comparisons

See especially how the inclusion of Potential Event of Default makes the much talked-about, seldom understood Section 2(a)(iii) condition to payments far more sensitive than it has any right to be.

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Summary

A Potential Event of Default is a Failure to Pay or Deliver, Breach of Agreement (or other Event of Default) with an unexpired grace period, or where the grace period has expired but the Non-defaulting Party hasn’t (yet) given a notice of default actually accelerating the default into an actual Event of Default.

That means, 2(a)(iii) defenders, that any formal breach of the ISDA Master Agreement, if notified by the Non-defaulting Party, renders the Section 2(a)(iii) conditions precedent unfulfilled, and means you can suspend performance of your obligations under all outstanding Transactions. I don’t make the rules, folks.

Actually, courtesy of that parenthetical “, or both,” it is worse even than that, though we think common courtesy (or at any rate, sense} would intervene to prevent non-notified formal breaches being acted upon. But not the literal terms of the ISDA: A formal breach — any non-compliance with its terms more grievous than a failure to provide tax certificates (that is specifically carved out) on commission suspends the other Party’s obligations until cured.

This is truly a custom more honoured in the breach than th’observance, and just as well: if ISDAs locked up every time a party was late with its annual Sox attestation only half the world’s swap financing would ever get paid.

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General discussion

Grace periods and notice requirements for each Event of Default

A JC cut-out-and-keep™ guide. Useful if you are fretting about Potential Event of Default. Don’t feel embarrassed: we all do, every now and then, when spring is upon us.

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See also

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References

  1. See for example Sections 5(a)(viii)(4) and (7).
  2. 30 days in the 1992 ISDA, 15 days in the 2002 ISDA.