1987 ISDA Interest Rate and Currency Exchange Agreement
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ISDA Anatomy™
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Well-and-truly out-of-date version of the ISDA Master Agreement, replaced firsst by the 1992 ISDA and then the 2002 ISDA, the 1987 ISDA is nonetheless useful for forensic archaeologists interested to know how the state of the art version got to be how it is today[1]. Nineteen eighty-seven was a different world; the very first swap transaction[2] was only consummated in 1981. The swap master agreement was a nascent idea to streamline the documentation between counterparties, and to capture this nascent idea of close-out netting, but was basically predicated on the legal precepts of banking facilities. An ISDA Master Agreement is not, of course, any kind of banking facility: certainly not if it is daily-margined, as is now required by regulation for most of the 600 trillion of swaps transacted annually.
Many of the lending-derived credit concepts in the ISDA Master Agreement are practically redundant, but they hang on — artifacts of the great dogma of precedent[3]. If it is in the agreement, it must be there for a reason, and if I cannot conceive of one that must be down to my own mental frailty, rather than the caution or basic fussiness of our forefathers and foremothers.
So if you find something odd, check the fossil record to see if it has been there from the outset. If it has — for example, the 20-day limit on close out notices under Section 6(a) — then there’s a fair chance the market developments of the last 32 years might have rendered it pointless.
Differences between {{1987isda and 1992 ISDA
The 1992 ISDA was introduced principally, to:
- Expand range of products covered: Expand beyond interest rate derivatives and currency derivatives and promote the benefit of close-out netting
- Market Developments: Reflect legal developments between 1987 and 1992.
- Physical delivery: Permit physical delivery
- Settlement Amounts: Introduce greater flexibility for determining Settlement Amounts on termination of Transactions (introducing the Loss, Market Quotation, First Method and Second Method regimes thereafter replaced in the 2002 ISDA by Close-out Amount).
- Two-way payments on termination: Under the 1987 ISDA a party may not receive termination payments (this is the "limited two-way payment" provision).
- Settlement netting: more flexibility for netting groups of transactions under Section 2 - under the 1987 ISDA you could either net just within single transactions or across all Transactions.
there are some others - a helpful guide can be found here
Relevant Provisions
- 5(a)(vii) Bankruptcy. The party or any applicable Specified Entity:–
- (1) is dissolved;
- (2) becomes insolvent or fails or is unable or admits in writing its inability generally to pay its debts as they become due;
- (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors;
- (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for the winding-up or liquidation of the party or any such Specified Entity, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition
- (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for the winding-up or liquidation of the party or such Specified Entity or
- (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof;
- (5) has a resolution passed for its winding-up or liquidation;
- (6) seeks or becomes subject to the appointment of an administrator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets (regardless of how brief such appointment may be, or whether any obligations are promptly assumed by another entity or whether any other event described in this clause (6) has occurred and is continuing);
- (7) any event occurs with respect to the party or any such Specified Entity which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (6) (inclusive); or
- (8) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts;
- other than in the case of clause (1) or (5) or, to the extent it relates to those clauses, clause (8), for the purpose of a consolidation, amalgamation or merger which would not constitute an event described in (viii) below; or
6(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the ‘‘Defaulting Party’’) has occurred and is then continuing, the other party may, by not more than 20 days’ notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Swap Transactions. However, an Early Termination Date will be deemed to have occurred in respect of all Swap Transactions immediately upon the occurrence of any Event of Default specified in Section 5(a)(vii)(1), (2), (3), (5), (6), (7) or (8) and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence of any Event of Default specified in Section 5(a)(vii)(4).
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ISDA Anatomy™
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