Template:M gen 2002 ISDA Affected Party

The Definition of {{{{{1}}}|Close-out Amount}}

Remember the way a Determining Party values a Terminated Transaction is calculates its own close-out value — in our nutshell terms, “the losses the {{{{{1}}}|Determining Party}} would incur (positive) or gains it would realise (negative) in replacing the material terms and the option rights of the parties under a {{{{{1}}}|Terminated Transaction}}”. One assesses “the costs one would incur” from ones’ own side of the market. A large party of the question comes down to who the Determining Party is for a given termination event.

Defaulting Party

Under an {{{{{1}}}|Event of Default}}, it is the {{{{{1}}}|Non-Defaulting Party}} at all times (since on the theory of the game, the {{{{{1}}}|Defaulting Party}} is either a miscreant or a smoking hulk of twisted metal, there is no one else around to do this. Therefore, it being an {{{{{1}}}|Event of Default}} is always optimal for the {{{{{1}}}|Innocent Party}}, since it will always be the {{{{{1}}}|Determining Party}}.

One Affected Party

Where the terminating impetus is not so outrageous as to qualify as an {{{{{1}}}|Event of Default}} — i.e., it is only a Termination Event — but it only impacts one party, in most cases it is the same as for an Event of Default. There is one Affected Party, the Non-Affected Party is the sole Determining Party, so it closes out on its own side of the market ... unless the event in question is an {{{{{1}}}|Illegality}} or a {{{{{1}}}|Force Majeure Event}}, in which case there is a rider in Section {{{{{1}}}|6(e)(ii)(3)}} applies and the {{{{{1}}}|Determining Party}} has to get mid market quotations that don’t take its own creditworthiness into account. But note that the most commonly triggered type of Termination Event is an {{{{{1}}}|Additional Termination Event}}, these tend to have a defaulty, turpidudinous character about them, almost never happen to two people at once, and therefore behave exactly like Events of Default.

Two Affected Parties

When both parties are affected — a scenario the ISDA only contemplates for {{{{{1}}}|Termination Event}}s; {{{{{1}}}|Events of Default}} being more of a “she who draws first wins” sort of affair, where the first in time prevails — then each party is a “Determining Party” calculates its own close-out value — in our nutshell terms, “the losses the {{{{{1}}}|Determining Party}} would incur (positive) or gains it would realise (negative) in replacing the material terms and the option rights of the parties under a {{{{{1}}}|Terminated Transaction}}” — throws it into the ring and the {{{{{1}}}|Calculation Agent}} splits the difference. Assuming both parties calculate so the end result is necessarily a mid-market number.

All so confusing. If only there were someone to set it all out in a table for you.

Awwwwww.

JC’s cut-out-and-keep™ guide to terminating {{{{{1}}}|Transactions}}

Event	How many affected	What happens
{{{{{1}}}|Events of Default}} Q.E.D. there is only one {{{{{1}}}|Defaulting Party}}: {{{{{1}}}|5(a)(i)}} {{{{{1}}}|Failure to Pay or Deliver}} {{{{{1}}}|5(a)(ii)}} {{{{{1}}}|Breach of Agreement}} {{{{{1}}}|5(a)(iii)}} {{{{{1}}}|Credit Support Default}} {{{{{1}}}|5(a)(iv)}} {{{{{1}}}|Misrepresentation}} {{{{{1}}}|5(a)(v)}} {{{{{1}}}|Default Under Specified Transaction}} {{{{{1}}}|5(a)(vi)}} {{{{{1}}}|Cross Default}} {{{{{1}}}|5(a)(vii)}} {{{{{1}}}|Bankruptcy}} {{{{{1}}}|5(a)(viii)}} {{{{{1}}}|Merger without Assumption}}	{{{{{1}}}|Defaulting Party}} only	Non-defaulting Party}} calculates on its own side of market.
Termination Events where there is only one Affected Party And this odd rider in Section {{{{{1}}}|6(e)(ii)(3)}} requiring a midmarket price does not apply: {{{{{1}}}|5(b)(iii)}} {{{{{1}}}|Tax Event}} {{{{{1}}}|5(b)(iv)}} {{{{{1}}}|Tax Event Upon Merger}} {{{{{1}}}|5(b)(v)}} {{{{{1}}}|Credit Event Upon Merger}} {{{{{1}}}|5(b)(vi)}} {{{{{1}}}|Additional Termination Event}}	One {{{{{1}}}|Affected Party}} only	Non-Affected Party}} calculates on its own side of market.
Termination Events where there is only one Affected Party but ... This odd rider in Section {{{{{1}}}|6(e)(ii)(3)}} requiring a midmarket price does apply: {{{{{1}}}|5(b)(i)}} {{{{{1}}}|Illegality}} {{{{{1}}}|5(b)(ii)}} {{{{{1}}}|Force Majeure Event}}	One {{{{{1}}}|Affected Party}} only	Non-Affected Party}} seeks prices by reference to mid-market values and which do not reflect its own credit.
{{{{{1}}}|Termination Events}} where there are two {{{{{1}}}|Affected Parties}} {{{{{1}}}|5(b)(i)}} {{{{{1}}}|Illegality}} {{{{{1}}}|5(b)(ii)}} {{{{{1}}}|Force Majeure Event}} {{{{{1}}}|5(b)(iii)}} {{{{{1}}}|Tax Event}} {{{{{1}}}|5(b)(iv)}} {{{{{1}}}|Tax Event Upon Merger}}	Each party is an {{{{{1}}}|Affected Party}}	Determining Parties}}, and {{{{{1}}}|Calculation Agent}} splits the difference ergo it is a midmarket rate.