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Section 3

Section 3 in a nutshell

3. Representations
Each party makes the representations below (with Section 3(g) representations only if specified in the Schedule) and repeats them on the date it enters into each Transaction and, for Section 3(f) representations, at all times until they terminate this Agreement). Any “Additional Representations” will be made and repeated as specified.
3(a) Basic Representations

3(a)(i) Status. It is duly organised and validly existing under the laws of its jurisdiction and is, where relevant, in good standing;

3(a)(ii) Powers. It has the power to execute, deliver and perform this Agreement and any Credit Support Document to which it is a party and has done everything needed to do so;

3(a)(iii) No Violation or Conflict. Its entry into and performance of this Agreement is not contrary to law, its constitutional documents, or any court or government order or contractual restriction affecting it or its assets;

3(a)(iv) Consents. It has all regulatory approvals needed to enter and perform this Agreement and any Credit Support Document to which it is a party and they remain unconditional and in full force; and

3(a)(v) Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party are its legal, valid and binding obligations, enforceable in accordance with their terms (subject to general laws affecting creditors’ rights and equitable principles).

3(b) Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event is in existence for that party or would happen if it entered or performed this Agreement or any Credit Support Document.
3(c) Absence of Litigation. There is no pending or threatened litigation against it, any Credit Support Providers or any Specified Entities before any court or government agency that could affect the legality, enforceability or its ability to perform this Agreement or any Credit Support Document.
3(d) Accuracy of Specified Information. The Specified Information designated as being subject to this Section 3(d) representation is, as at its stated date, materially accurate and complete.
3(e) Payer Tax Representation. Each of its Payer Tax Representations specified in the Schedule is true.
3(f) Payee Tax Representation. Each Payee Tax Representation it has made to which this Section 3(f) applies (as specified in the Schedule) is true.
3(g) No Agency. It is a principal and not an agent under this Agreement.

Comparison between versions

Redlines

• 1987 ⇒ 1992: Redline of the ’92 vs. the ’87: comparison (and in reverse)
• 1992 ⇒ 2002: Redline of the ’02 vs. the ’92: comparison (and in reverse)
• 1987 ⇒ 2002: Redline of the ’92 vs. the ’87: comparison (and in reverse)

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Discussion

As the comparisons above illustrate the Representations have remained largely intact since the 1987 ISDA.

There is no “No Agency” representation in the 1992 ISDA or the 1987 ISDA. A fun part of the ritual of negotiating a 1992 ISDA always was — in America, we imagine, still is — to put one in, so when those kill-joys on ISDA’s crack drafting squad™ shunted one into the 2002 ISDA it will have ruined a few people’s days — so much so that, in some quarters, they still use the 1992 ISDA as a standard. Americans, for example.

A JC digression, if I may. The 2002 ISDA was published now over two decades ago. Since 1992, a great deal has happened which the derivatives industry has learned from: the Internet; email; Enron, LTCM, the Russian Crisis, the GFC, the LIBOR scandal, COVID, the rise and fall of asset classes, cryptocurrencies and artificial intelligence (... yes and they are sure to rise again, and crush us all. Keep holding your breath). Nevertheless, we are stuck in our ways. Not only has the 2002 ISDA not been updated, or even had an update proposed, large parts of the derivatives market — and the most sophisticated, heavy-hitting parts of that market, what is more: the American parts — still trade on the 1992 Master Agreement.

We mention this not to make fun of Americans, or the derivatives industry more generally, however they richly deserve it — we do plenty enough of that in these pages as it is — but to temper the expectations of those who think anything is going to change any time soon. There are far too many vested, rent-seeking interests in things chuntering along just how they are for anyone to be seriously confronted with the idea of having to adopt anything new. Allen Farrington might claim that Bitcoin fixes a lot of things: it does not fix this.

Discussion

If you want any special extra Representations over and above the boring ones in Section 3, stick them in Part 5 of the Schedule, or maybe a master confirmation, be sure to label them “Additional Representations” and, if the fancy catches you, have the representor deem them repeated on the commencement of any new Transaction, the anniversary of the ISDA Master Agreement or whenever, in a moment of weakness, insecurity or indolence, your operations team feels like reaching out to the counterparty and asking it to say them again. They’ll love you for it.

Yes, Misrepresentation is an Event of Default

A breach of any of these Representations when made (or deemed repeated) (except a Payer or Payee Tax Representation, but including any Additional Representation is an Event of Default. Eventually.

Additional Representations as Additional Termination Events

In the case of Additional Representations this can be somewhat drastic, especially if your Additional Representation is Transaction-specific (for example India, China and Taiwan investor status reps for equity derivatives), and it would seem churlish to close out a whole ISDA Master Agreement on their account.

Then again, show me a swap dealer who would detonate an entire swap trading relationship with a solvent counterparty and I’ll show you a moron — but, as we know, opposing legal eagles operate on the presumption that everyone else is a moron and thus tend to be immune to such grand rhetorical flourishes, and regard such appeals to basic common sense as precisely such flourishes, so don’t expect that argument to carry the day, however practically true it may be.

Instead, expect to encounter leagues of agonising drafting, but there are easier roads to travel. Try:

These representations will be Additional Representations, except that where they prove to be materially incorrect or misleading when made or repeated it will not be an Event of Default but an Additional Termination Event, where the Transactions in question are the Affected Transactions and the misrepresenting party is the sole Affected Party.