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PART I: PRELIMINARY

MI by 2002
MI by 2002

Comparisons

The 1987 ISDA, being concerned only with interest rates and currency exchange, does not contemplate delivery, as such. Delivery implies non-cash assets. Therefore portions of 2(a)(i) and 2(a)(ii) were augmented in the 1992 ISDA to cater for this contingency. The 1992 ISDA also added a condition precedent to the flawed asset clause (Section 2(a)(iii)) that no Early Termination Date had been designated.

Thereafter Section 2(a) is identical in the 1992 ISDA and the 2002 ISDA. However the subsidiary definition of Scheduled Settlement Date — a date in which any Section 2(a)(i) obligations fall due — is a new and frankly uncalled-for innovation in the 2002 ISDA.

We have a special page dedicated to Section 2(a)(iii), by the way. That is a brute, and one of the most litigationey parts of the Agreement.

Summary

Section 2 contains the basic nuts and bolts of your obligations under the Transactions you execute. Pay or deliver what you’ve promised to pay or deliver, when you’ve promised to pay it or deliver it, and all will be well.

“Scheduled Settlement Date”

Though it doesn’t say so, at least in the 2002 ISDA the date on which you are obliged to pay or deliver an amount is the “Scheduled Settlement Date”. The ’02 definition only shows up only in Section 2(b) (relating to the time by which you must have notified any change of account details) and then, later, in the tax-related Termination Events (Tax Event and Tax Event Upon Merger). That said, “Scheduled Settlement Date” isn’t defined at all in the 1992 ISDA.

Section 2(a)(iii): the flawed asset provision

And then there’s the mighty flawed asset provision of Section 2(a)(iii). This won’t trouble ISDA negotiators on the way into a swap trading relationship — few enough people understand it sufficiently well to argue about it — but if, as it surely will, the great day of judgment should visit upon the financial markets again some time in the future, expect plenty of tasty argument, between highly-paid King’s Counsel who have spent exactly none of their careers considering derivative contracts, about what it means.

We have some thoughts on that topic, should you be interested, at Section 2(a)(iii).

Flawed assets

Section 2(a)(iii): Of these provisions, the one that generates the most controversy (chiefly among academics and scholars, it must be said) is Section 2(a)(iii). It generates a lot less debate between negotiators, precisely because its legal effect is nuanced, so its terms are more or less inviolate. Thus, should your counterparty take a pen to Section 2(a)(iii), a clinching argument against that inclination is “just don’t go there, girlfriend”.

Payments and deliveries

In a rare case of leaving things to practitioners’ common sense, ISDA’s crack drafting squad™ deigned not to say what it meant by “payment” or “delivery”.

Payments

Payments are straightforward enough, we suppose — especially since they are stipulated to be made in “freely transferable funds and in the manner customary for payments in the required currency”: beyond that, money being money, you either pay or you don’t: there are not too many shades of meaning left for legal eagles to snuggle into.

Deliveries

Deliveries, though, open up more scope for confecting doubts one can then set about avoiding. what does it mean to deliver? What of assets in which another actor might have some claim, title or colour of interest? In financing documents you might expect at least a representation that “the delivering party beneficially owns and has absolute rights to deliver any required assets free from any competing interests other than customary liens and those arising under security documents”.

What better cue could there be for opposing combatants leap into their trenches, and thrash out this kind of language?

Less patient types — like yours truly — might wish to read all of that into the still, small voice of calm of the word “deliver” in the first place.

What else could it realistically mean, but to deliver outright, and free of competing claims? It is bound up with implications about what you are delivering, and whose the thing is that you are delivering. It would be absurd to suppose one could discharge a physical delivery obligation under a swap by “delivering” an item to which one had no title at all: it is surely implicit in the commercial rationale that one is transferring, outright, the value implicit in an asset and not just the formal husk of the asset itself, on terms that it may be whisked away at any moment at the whim of a bystander.

Swaps are exchanges in value, not pantomimes: one surrenders the value of the asset for whatever value one’s counterparty has agreed to provide in return. Delivery is not just some kind of performative exercise in virtue signalling. You have to give up what you got. As the bailiffs take leave of your counterparty with the asset you gave it strapped to their wagon, it would hardly do to say, “oh, well, I did deliver you that asset: it never said anywhere it had to be my asset, or that I was meant to be transferring any legal interest in it to you. It is all about my act of delivery, I handed something to you, and that is that.”

We think one could read that into the question of whether a delivery has been made at all. Should a third party assert title to or some claim over an asset delivered to you, your best tactic is not a vain appeal to representations your counterparty as to the terms of delivery, but to deny that it has “delivered” anything at all. “I was meant to have the asset. This chap has repossessed it; therefore I do not have it. If I don’t have it, it follows that you have failed to deliver it.”

Modern security as practical control

In any weather, nowadays much of this is made moot by the realities of how financial assets are transferred: that is, electronically, fungibly, in book-entry systems, and therefore, by definition, freely: a creditor takes security over accounts to which assets for the time being are credited, or by way of physical pledge where the surety resides in the pledgee holding and therefore controlling the securities for itself. It is presumed that, to come about, any transfer of assets naturally comes electronically and without strings attached. It would be difficult for such a security holder to mount a claim for an asset transferred electronically to a bona fide third party recipient for value and without notice: the practicalities of its security interest lie in its control over the asset in the first place: holding it, or at the least being entitled to stop a third party security trustee or escrow custodian delivering away the asset without the security holder’s prior consent.

Comparisons

But for the new definition of Scheduled Settlement Date in the 2002 ISDA, the 1992 ISDA text is formally the same.

Summary

ISDA’s crack drafting squad™ phoning it in, we are obliged to say, and not minded to make any better a job of it when given the opportunity to in 2002. On the other hand, in this time of constant change, it is reassuring to know some things just stay the same.

General discussion

Template:M gen 2002 ISDA 2(b)

Comparisons

The 2002 ISDA introduces the concept of Multiple Transaction Payment Netting, thereby correcting a curiously backward way of applying settlement netting.

Summary

Section 2(c) is about “settlement” or “payment” netting — that is, the operational settlement of offsetting payments due on any day under the normal operation of the Agreement — and not the more drastic close-out netting, which is the Early Termination of all Transactions under Section 6.

If you want to know more about close-out netting, see Single Agreement and Early Termination Amount.

We wonder what the point of this section is, since settlement netting is a factual operational process for performing existing legal obligations, rather than any kind of variation of the parties’ rights and obligations. If you owe me ten pounds and I owe you ten pounds, and we agree to both keep our tenners, what cause of action arises? What loss is there? We have settled our existing obligations differently.

To be sure, if I pay you your tenner and you don’t pay me mine, that’s a different story — but then there is no settlement netting at all. The only time one would wish to enforce settlement netting it must, ipso facto, have happened, so what do you think you’re going to court to enforce?

Transaction flows and collateral flows

In a fully margined ISDA Master Agreement, all other things being equal, the termination of a Transaction will lead to two equal and opposite effects:

• A final payment or exchange under the Transaction having a value more or less equal to the present value of that Transaction;
• A offsetting change in the Exposure under the CSA in exactly the same value.

The strict sequence of these payments ought to be that the Transaction termination payment goes first, and the collateral return follows, since it can only really be calculated and called once the termination payment has been made.

I know what you’re thinking. Hang on! that means the termination payer pays knowing this will increase its Exposure for the couple of days it will take for that collateral return to find its way back. That’s stupid!

What with the regulators’ obsession minimise systemic counterparty credit risk, wouldn’t it be better to apply some kind of settlement netting in anticipation, to keep the credit exposure down?

Now, dear reader, have you learned nothing? It might be better, but “better” is not how ISDA documentation rolls. The theory of the ISDA and CSA settlement flows puts the Transaction payment egg before the variation margin chicken so, at the moment, Transaction flows and collateral flows tend to be handled by different operations teams, and their systems don’t talk. Currently, the payer of a terminating transaction has its heart in its mouth for a day or so.

Industry efforts to date have been targeting at shortening the period between the Exposure calculation and the final payment of the collateral transfer.

Comparisons

Other than an “on or after the date on which” embellishment towards the end of the clause, exactly the same text in the 1992 ISDA and the 2002 ISDA.

Summary

Section 2(d) does the following:

• Net obligation: if a counterparty suffers withholding it generally doesn’t have to gross up – it just remits tax to the revenue and pays net.
• Refund obligation where tax subsequently levied: if a counterparty pays gross and subsequently is levied the tax, the recipient must refund an equivalent amount to the tax.
• Indemnifiable Tax: the one exception is “Indemnifiable Tax” - this is tax arises as a result of the payer’s own status vis-à-vis the withholding jurisdiction. In that case the payer has to gross up, courtesy of a magnificent quintuple negative.

Stamp Tax reimbursement obligations are covered at 4(e), not here.

News from the pedantry front

Happy news, readers: we have a report from the front lines in the battle between substance and form. The JC asked no lesser a tax ninja than Dan Neidle — quietly, the JC is a bit of a fan — the following question:

In the statement, “X may make a deduction or withholding from any payment for or on account of any tax” is there any difference between “deducting” and “withholding”?

They seem to be exact synonyms.

Likewise, “for” vs. “on account of”?

We are pleased to report Mr N opined replied:

I don’t think there’s a difference. Arguably it’s done for clarity, because people normally say “withholding tax” but technically there’s no such thing — it’s a deduction of income tax.

Which is good enough for me. So all of that “shall be entitled to make a deduction or withholding from any payment which it makes pursuant to this agreement for or on account of any Tax” can be scattered to the four winds. Henceforth the JC is going with:

X may deduct Tax from any payment it makes under this Agreement.

General discussion

Template:M gen 2002 ISDA 2(d)

Details

MI by 2002

Comparisons

The Section 3(a) Basic Representations survived intact, to the last punctuation mark, between the 1992 ISDA and the 2002 ISDA. They were that excellent.

Summary

An observant negotiator (is there any other kind?) handling a 1992 ISDA might wish to add a new agency rep as Section 3(a)(vi). In 2002, ISDA’s crack drafting squad™ obviously thought this was such a good idea that they added a brand-new “no-agency” rep to the 2002 ISDA, only they can’t have felt it was basic enough to go in the Basic Representations, so they put it in a new clause all by itself at Section 3(g).

But you don’t need a bespoke “no-agency” rep if you’re on a 2002 ISDA, if that’s what you’re wondering.

3(a)(v) Obligations Binding

“any Credit Support Document to which it is a party”: Business at the front; party at the back.

Now given that a Credit Support Document will generally be a deed of guarantee, letter of credit or some other third party form of credit assurance from a, you know, third party to which a Party in whose favour it is provided will not be a “party” — and no, an 1995 CSA is not a Credit Support Document, however much it might sound like one, one might wonder what the point would be of mentioning, in this sub-section, Credit Support Documents to which a Party is party.

Well — and this might come as a surprise if you’re an ISDA ingénue; old lags won’t bat an eyelid — there isn’t much point.

But does anyone, other than the most insufferable pedant, really care? I mean why would you write a snippy wiki article about some fluffy but fundamentally harmless language unless you were a stone-cold bore?

Hang on: Why are you looking at me like that?

Comparisons

No change from 1992 ISDA to 2002 ISDA.

Summary

Can you understand the rationale for this representation? Sure.

Does it do any practical good? No.

It is a warranty, not a representation

A standard, but useless, contractual warranty. It can’t be a pre-contractual representation, of course, because the very idea of an “event of default” depends for its intellectual existence on the conclusion of the contract in which it is embedded. So, it won’t really do to argue there should be no contract, on grounds of the false representation that a contract that does not exist has not been breached.

It is paradoxes all the way down

A No EOD rep is a classic loo paper rep: soft, durable, comfy, absorbent — super cute when a wee Labrador pub grabs one end of the streamer and charges round your Italian sunken garden with it — but as a credit mitigant or a genuine contractual protection, only good for wiping your behind on.

Bear in mind you are asking someone — on pain of them being found in fundamental breach of contract — to swear to you they are not already in fundamental breach of contract. Now, how much comfort can you genuinely draw from such promise? Wouldn’t it be better if your credit team did some cursory due diligence to establish, independently of the say-so of the prisoner in question, whether there are grounds to suppose it might be in fundamental breach of contract?

Presuming there are not — folks tend not to publicise their own defaults on private contracts, after all — the real question here is, “do I trust my counterparty?” And to that question, any answer provided by the person whose trustworthiness is in question, carries exactly no informational value. All cretins are liars.

So, let’s say it turns out your counterparty is lying; there is a pending private event of default it knew about and you didn’t. Now what are you going to do? Righteously detonate your contract on account of something of which by definition you are ignorant?

Have fun, counsellor.

“...or potential event of default”

Adding potential events of default is onerous, especially if it is a continuous representation, as it deprives the representor of grace periods it has carefully negotiated into its other payment obligations. Yes, it is in the ISDA Master Agreement.

“... or would occur as a result of entering into this agreement”

A curious confection, you might think: what sort of event of default could a fellow trigger merely by entering into an ISDA Master Agreement with me? Well, remember the ISDA’s lineage. It was crafted, before the alliance of men and elves, by the Children of the Woods. They were a species of pre-derivative, banking people. It is possible they had in mind the sort of restrictive covenants a banker might demand of a borrower with a look of softness about its credit standing: perhaps a promise not to create material indebtedness to another lender, though in these enlightened times that would be a great constriction indeed on a fledgling enterprise chasing the world of opportunity that lies beyond its door.

So, does a swap mark-to-market exposure count as indebtedness? Many will recognise this tedious question as one addressed at great length when contemplating a Cross Default: Suffice, here, to say that an ISDA isn’t “borrowed money” as such, but a material swap exposure would have the same credit characteristics as indebtedness. But in these days of compulsory variation margin you wouldn’t expect one’s mark-to-market exposure to be material, unless something truly cataclysmic was going on intra-day in the markets.

Much more likely is a negative pledge, and while an unsecured, title-transfer, close-out netted ISDA might not offend one of those, a Pledge GMSLA might, and a prime brokerage agreement may well do.

But still, nonetheless, see above: if it does, and your counterparty has fibbed about it, all you can do is get out your tiny violin.

Comparisons

Section 3(c) was one of the bits of the 1992 ISDA that ISDA’s crack drafting squad™ “got mostly right” at the first time of asking. But still, some bright sparks on the ’Squad took it upon themselves, in the 2002 ISDA, to switch out reference to “Affiliates” which — I don’t know, might take in some distant half-bred cousin you don’t enormously care about and who doesn’t cast any real shadow on your creditworthiness — with “Credit Support Providers” and “Specified Entities” who no doubt more keenly do, but this leads to just more fiddliness in the Schedule over-stuffed with fiddliness, since one must then go to the trouble of specifying, and then arguing with your counterparties about, who should count as a Specified Entity for this remote and rather vacuous purpose.

Keeps the home fires burning in the hobbity shires where ISDA negotiators make their homes, we suppose.

Summary

Reference to Affiliates can be controversial, particularly for hedge fund managers.

More generally, absence of litigation is a roundly pointless representation, but seeing as (other than unaffiliated hedge fund managers) no-one complains about it, it is best to just leave well alone.

Absence of litigation generally

An absence of litigation representation seeks to address litigation carrying two particular risks:

• Enforceability: Litigation that could somehow undermine or prejudice the very enforceability of life was we know it (a.k.a the agreement you are presently negotiating);
• Credit deterioration: Litigation that is so monstrous in scope that it threatens to wipe your counterparty from the face of the earth altogether, while it still owes you under the agreement you’re negotiating.

Enforceability-threatening litigation

Firstly, Earth to Planet ISDA: what kind of litigation or regulatory action — we presume about something unrelated to this agreement since, by your theory, it doesn’t damn well exist yet — could adversely impact in the enforceability of this future private legal contract between one of the litigants and an unrelated, and ignorant, third party?

Search me. But still, I rest assured there will an ISDA boxwallah out there somewhere who could think of something.

Existentially apocalyptic litigation

Look, if your counterparty is banged up in court proceedings so awful to behold that an adverse finding might bankrupt it altogether, and your credit sanctioning team hasn’t got wind of it independently then, friend, you have way, way bigger problems than whether you have this feeble covenant in your docs. And, if you are only catching it at all thanks to a carelessly given absence of litigation rep, by the time said litigation makes itself known to you. won’t it be a bit late?

Deemed repetition

Ah, you might say, but what about the deemed repetition of this representation? Doesn’t that change everything?

Deemed repetition

What of this idea that one not only represents and warrants as of the moment one inks the paper, but also is deemed to repeat itself an the execution of each trade, on any day, or whenever a butterfly flaps its wings on Fitzcarraldo’s steamer? Do we think it works? Do we? Given how practically useless even explicit representations are, does it really matter?

And, having given it, how are you supposed to stop a continuing representation once it has marched off into the unknowable future, like one of those conjured brooms from the Sorcerer’s Apprentice? If you don’t stop it, what then? This may seem fanciful to you, but what are buyside lawyers if not creatures of unlimited, gruesome imagination? Are their dreams not full with flights of just this sort of fancy? Rest assured that, as you do, they will be chewing their nails to the quick in insomniac fever about this precise contingency.

For which reason — it being a faintly pointless representation in the first place and everything — it might be best just to concede this point when it arises, as inevitably it will.

Pick your battles

All that said, and probably for all of the above reasons, parties tend not to care less about this representation, so your practical course is most likely to leave it where you find it.

Comparisons

ISDA’s crack drafting squad™ must have got this spot-on in their first attempt in 1992, because their successors in 2002 could not find so much as an inverted comma to change.

Summary

The fabulous Section 3(d) representation, giving one’s counterparty the right to close out should any so-designated representations turn out not to be true. This is sure to occupy an inordinate amount of your negotiation time — in that it occupies any time at all — because you are as likely to be hit in the face by a live starfish in the Gobi Desert as you are to close out an ISDA Master Agreement because your counterparty is late in preparing its annual accounts. But that’s a personal view and you may not rely on it.

The 3(d) representation, in the documents for delivery table in the Schedule, therefore covers only the accuracy and completeness of Specified Information and not (for example) whether Specified Information is delivered at all. For that, see Section 4(a) - Furnish Specified Information.

“Covered by the Section 3(d) Representation”

If one is required to “furnish” Specified Information under Section 4, two things can go wrong:

No show: One can fail to provide it, at all, in which case there is a Breach of Agreement, but be warned: the period before one can enforce such a failure, judged by the yardstick of modern financial contracts, is long enough for a whole kingdom of dinosaurs to evolve and be wiped out; or

It’s cobblers: One can provide the Specified Information, on time, but it can be a total pile of horse ordure. Now, here is a trick for young players: if your Specified Information is, or turns out to be, false, you have no remedy unless you have designated that it is “subject to the Section 3(d) representation”. That is the one that promises it is accurate and not misleading.

Might Section 3(d) not cover a representation?

Now you might ask what good an item of Specified Information can possibly be, if Section 3(d) didn’t apply and it could be just made up on the spot without fear of retribution — as a youngster, the JC certainly asked that question, and has repeated it over many years, and is yet to hear a good answer — but all we can presume is that in its tireless quest to cater for the unguessable predilections of the negotiating community, ISDA’s crack drafting squad™ left this preposterous option open just in case. It wouldn’t be the first time.

Legal opinions, and Credit Support Documents

A trawl through the SEC’s “Edgar” archive reveals that the sorts of things to which “Covered by Section 3(d) Representation” results in a “No” outcome are rare — but not non-existent. It is things like “Legal opinion from counsel concerning due authorization, enforceability and related matters, addressed to the other party and reasonably acceptable to such other party”, or “Credit Support Documents”.
See further discussion in the sections below.

Annual reports

The other little fiddle — and it is a little fidgety fiddle — is to remark of annual reports that, yes, they are covered by that Section 3(d) representation, but with a proviso:

“Yes; provided that the phrase “is, as of the date of the information, true, accurate and complete in every material respect” in Section 3(d) shall be deleted and the phrase “fairly presents, in all material respects, the financial condition and results of operations as of their respective dates and for the respective periods covered thereby” shall be inserted in lieu thereof.”

More on “covered by the Section 3(d) Representation”

We went digging a little deeper. These are the only examples we could find before we got bored looking. In each case we are not persuaded these caveats accommodate anyone other than our value-adding learned friends:

Legal opinions

Should a legal opinion issued by a third party who is not party to the agreement, or even affiliated with it, have to be true in the Section 3(d) sense?

The predictable response is for the counterparty to say, “look: I’m not a lawyer, okay, so it can hardly be on me if the legal advice I get in good faith happens to be wrong?” We suppose this is excluded because the Party to the ISDA is not the author of the legal opinion, nor professionally competent to pass on its contents (hence the need for the legal opinion in the first place), so should hardly be expected to be held to account for it.

This may be expressed to you, dissonantly, in the honeyed prose of a private practice lawyer — a vernacular foreign to most ISDA negotiators. You may wonder whether it has not been disingenuously spoon-fed to your counterpart by just such a fellow. We will not speculate. But we will observe that, while it may seem compelling at first, it is bad logic. It presumes that what matters is the probity with which a counterparty conducts itself; that it acts in good faith and with a benign disposition; that its “good chapness” —the basic honesty it shows when dealing with its market counterparties — is beyond reproach.

But this, we submit, is to misunderstand in a profound way the point of a commercial contract. There are no ethicists in a foxhole. Unlike criminal or even tort law, the law of contract is not an instrument of moral judgment. It cares only about economics: that one does, or does not, do what one has promised or — as in this case — that what one has represented to you is, or is not, true. The law of contract is broadly incurious about why.

What matters is the economic consequence of a falsity — the actus reus, not one’s mens rea. The object of a legal opinion is to confirm the accuracy of a legal representation. Instead of simply representing that, for example, you have the regulatory permission to act as a swap dealer, you have a legal opinion to confirms that fact, from one who should know.

Now, if I have engaged in a trading arrangement with you on the presumption that you are appropriately permissioned, licenced, and constitutionally able to enter into valid and binding swap contracts, and you satisfy my qualms by proffering the legal opinion of some respectable attorney-about-town you have found who will say it is so, and that attorney turns out to be wrong, my commercial position is no less parlous just because you weren’t to know your legal advisor was a clot. Regardless of whose fault it was, or how egregious was her negligence in being at fault, if the required regulatory permission does not exist, the comfort I seek is misplaced. I now have a portfolio of swaps which may not be enforceable. My claims may be suspended at any minute.

I want out before that can happen. I might wish you well, and bitterly regret it were not otherwise, but it is not otherwise. I need out. If that causes you some embarrassment, inconvenience or financial loss, then the person to whom you should look for redress is your lawyer.

Not for the first time, the “market standard,” for no reason other than it is a legal question and there is no-one else around qualified to gainsay it, is crafted to suit the personal interests of the opining legal community. Have no truck with this, fellows.

Credit Support Documents

We imagine here the perceived fear is that a Credit Support Document, being an executed legal contract, does not have a truth or falsity independent of itself the bargain it represents and evidences, so cannot really be a misrepresentation. But in a funny sense a legal contract constitutes the agreement it evidences: sure; the legal accord is an immaterial, intellectual thing, a consensus ad idem that inhabits the incarcerated space that separates us, and it cannot be fully delimited by mortal, combustible paper. But all the same, its written form can hardly contradict it. If the written agreement incontrovertibly says “I must go up” our legal compact can hardly require me to go down; the paper format surely constrains what one can take from, or give to, a contract.

That being the case, there is not really a meaningful sense in which a contract can “misrepresent” the actual accord it represents. or be “false”. There is something faintly, but elusively, paradoxical about this.

What might happen is that a counterparty submits a form that has been superseded, or terminated and thus is but a husk of an ex-contract; one that once existed but now does not. Alternatively, a truly mendacious counterparty might offer up a form that is not really a contract, or even evidence of one, at all: a forgery, or a fraud.

But in those cases, the operating cause of the falsehood is the party submitting the document, not the document offered by way of representation itself, and in each an innocent party is better protected if Section 3(d) Representation does apply.

Audited financial statements

Your adversary may try to crowbar in something like this, to satisfy her yen to make a difference and please her clients with her acumen and commercial fortitude:

“or, in the case of financial information, a fair representation of the financial condition of the relevant party, provided that the other party may rely on any such information when determining whether an Additional Termination Event has occurred.”

This is predicated on the following reasoning: “In publishing the audit, the auditor itself is not making any greater representation than that the statements are a fair representation of the financial conditions. I’m no accountant. I didn’t even write the stupid audit. How am I supposed to know? Why should I give any representation about the content of the audit at all, let alone a stronger representation than the expert? I am not underwriting the work of some bean-counter at Deloitte.”

Fair questions, but they misapprehend what is being asked. The riposte is this: The Part 3 information you must supply is “Party B’s annual audited financial statements.” So the representation we are after is that you have handed over a fair, accurate and complete copy of those audited statements, not that the statements themselves, as prepared by the auditor, are necessarily fair, accurate and complete. To get that comfort, we have the auditor’s own representation of the company’s financial condition, and we don’t need yours.

Details

Not providing documents for delivery is an Event of Default ... eventually

The importance of promptly sending required documents for delivery goes as follows:

• By dint of Section 4(a) you agree to furnish each other Specified Information set out in Part 3 of the Schedule.
• By dint of Section 5(a)(ii) if you don’t then that can be a Breach of Agreement Event of Default (Section 5(a)(ii)). Be warned: you must pursue a tortured chain of nested double negatives and carefully parse the interplay between Sections 4(a) and 5(a)(ii) to grasp this, but it is true.
• But, Section 5(a)(ii) imposes a thirty freaking day grace period following notice before a Breach of Agreement counts as an Event of Default allowing termination. (A Failure to Pay or Deliver is excluded from that definition, by the way, because it has its own EOD with a much tighter grace period).
• So if you need a document “furnished” urgently and can’t wait a month for it (you might not, if you are a credit officer and it is a monthly NAV statement, for example) then you must upgrade a simple 5(a)(ii) Breach of Agreement to a full-blown Additional Termination Event.
  

Comparisons

No change between Section 3(e) of the 1992 ISDA and Section 3(e) of the 2002 ISDA. To be fair, what’s there to change?

Summary

You’ll find the usual form of the Payer Tax Representations in Part 2(a) of the Schedule. They aren’t usually amended.

Withholding under the ISDA

TL;DR: The basic rationale is this:

• if the tax relates to the underlying instrument, rather than the Payer’s residence or tax status, the Payer does not have to gross up.
• if the tax relates to the Payer’s residence or tax status, then the Payer does have to gross up unless the Payee should have provided information to the Payer which would have entitled the Payer to avoid the tax.
• if you’ve agreed the FATCA Amendment, the Payer doesn’t have to gross up any FATCA Withholding Taxes.

The combination of the Payer Tax Representations and the Gross-Up clause of the ISDA Master Agreement has the following effect:

• Section 3(e): I promise you that I do not have to withhold on my payments to you (as long as all your Payee Tax Representations are correct and you have, under Section 4(a), given me everything I need to pay free of withholding);
• Section 2(d): I will not withhold on any payments to you. Unless I am required to by law. Which I kind of told you I wasn’t... If I have to withhold, I'll pay the tax the authorities and give you the receipt. If I only had to withhold because of my connection to the taxing jurisdiction (that is, if the withholding is an Indemnifiable Tax), I’ll gross you up. (You should look at the drafting of Indemnifiable Tax, by the way. It's quite a marvel). ...
• Gross-Up: Unless the tax could have been avoided if the Payee had taken made all its 3(f) representations, delivered all its 4(a) material, or had its 3(f) representations been, like, true).
• Stamp Tax is a whole other thing.
• As is FATCA, which (as long as you’ve made your FATCA Amendment or signed up to a FATCA Protocol, provides that FATCA Withholding Taxes are excluded from the Section 3(e) Payer Tax Representations, and also from the definition of Indemnifiable Tax. Meaning one doesn't have to rep, or gross up, FATCA payments.
  

Comparisons

No change between the 1992 ISDA and the 2002 ISDA.

Summary

US Payee Tax Representations

The required Payee Tax Representations depend on the nature of the Counterparty.

• US Person: Counterparty is a “U.S. person” for the purposes of the Internal Revenue Code of 1986 as amended.
• US Corporation: It is classified as a US Corporation for United States federal income tax purposes.
• Foreign Person: It is a “foreign person” for United States federal income tax purposes.
• Non-US Branch of Foreign Person: Each branch is a non-US branch of a foreign person for US federal income tax purposes
• Non-Withholding Partnership:It is classified as a “non-withholding foreign partnership” for United States federal income tax purposes.
• Connected Payments: Each payment received or to be received by it under this Agreement will be effectively connected with its conduct of a trade or business within the United States.
• Non-Connected Payments: Each such payment received or to be received by it in connection with this Agreement will not be effectively connected with its conduct of a trade or business in the United States
• Tax Treaty Benefits: It is fully eligible for the benefits of the “Business Profits” or “Industrial and Commercial Profits” provision, the “Interest” provision or any “Other Income” provision of the Income Tax Convention between the United States and Counterparty’s Jurisdiction* with respect to any payment described in such provisions and received or to be received by it in connection with this Agreement and no such payment is attributable to a trade or business carried on by it through a permanent establishment in the United States.
• Public International Organisation: It is a public international organization that enjoys the privileges, exemptions and immunities as an international organization under the International Organizations Immunities Act (22 U.S.C. 288-288f).
• Withholding and Reporting: It will assume withholding and reporting for any payments (or portions of any payments) determined to be non-Effectively Connected income for United States federal income tax purposes.
• Monetary Policy: Its primary purpose for entering into this Agreement is to implement or effectuate its governmental, financial or monetary policy.
  

General discussion

Template:M gen 2002 ISDA 3(f)

Details

MI by 2002

PART II: SECTION 5 DEFAULT AND EARLY TERMINATION

MI by 2002
MI by 2002
MI by 2002
MI by 2002

PART III: SECTION 6 CLOSE OUT

MI by 2002
MI by 2002

Comparisons

Template:Isda 6(b)(i) comp

Section 6(b)(i): Notice

It starts off gently. If you are subject to a Termination Event — remember these are generally extraneous things beyond your control like Tax Events, Illegality, Force Majeure, for which you can’t really be blamed, but which affect your capacity to efficiently perform the agreement, so this is nothing really to be ashamed about, even though it might colour your counterparty’s view of carrying on — you must notify your counterparty.

Comparisons

Template:Isda 6(b)(ii) comp

Summary

Once the Waiting Period expires, it will be a Termination Event entitling either party to terminate some or all Affected Transactions. Partial termination is permitted because the impact on an event on each Transaction may differ from case to case (eg transactions forming part of a structured finance deal like a repack or a CDO) might not be easily replaced, so the disadvantages of terminating may outweigh the advantages.

As far as branches are concerned this is relatively uncontroversial, especially if yours is a multi-branch ISDA Master Agreement. But there is an interesting philosophical question here, for, without an express pre-existing contractual right to do so, a party may not unilaterally transfer its obligations under a contract to someone else. That, being a novation, requires the other party’s consent. This is deep contractual lore, predating the First Men and even the Children of the Woods. So if the Affected Party identifies an affiliate to whom it can transfer its rights and obligations, the Non-affected Party still may withhold consent. True, it is obliged to provide consent if its policies permit but — well — y’know. Polices? Given the credit department’s proclivities for the fantastical, it’s a fairly safe bet they’ll be able to find something if they don’t feel up to it.

That is to say, this commitment falls some wat short of the JC’s favourite confection: “in good faith and a commercially reasonable manner”.

Note also that if an Non-Affected Party does elect partial termination, the Affected Party has the right to terminate some or all of the remaining Transactions: this prevents Non-Affected Parties being opportunistic. Heaven forfend.

Section 6(b)(ii): Transfer to Avoid Termination Event

Things start to go a bit wobbly. You sense that ISDA’s crack drafting squad™ has been on the sauce, or marching powder or something, and became attached to the idea of trying to codify the unknowable future. It gets worse before it gets better but here the permutations are about the parties tax status: either the Tax law has changed for one or other party — a Tax Event — or a party has executed some fancy cross-border merger which has somehow changed its tax residence, status, or eligibility of favourable tax treatment: this is a Tax Event Upon Merger. Here, in essence, you have a little window to sort yourself out, if you hadn’t done that before the merger (isn’t that what Tax advisors are for, by the way?).

Tax Event Upon Merger is also apt to create magnificent rounds of three-dimensional ninja combat drafting, because there is an Affected Party, and a Burdened Party, and they are not ~ necessarily ~ the same, and that is even before you worry about what has happened if there is a Credit Event Upon Merger (could be, right? There is a merger... so why not?) and/or a Force Majeure going on at the same time.

In any case: the Affected Party of a simple Tax Event, or the Affected Party of a TEUM who is also the Burdened Party must try doggedly for twenty days to transfer its rights and obligations to an unaffected Office or Affiliate before it is allowed to trigger an Early Termination Date. In any case the innocent, Unaffected Party, has a varnished right to decline the transfer if it can’t trade with the designated transferee.

Comparisons

Template:Isda 6(b)(ii) comp

Summary

Once the Waiting Period expires, it will be a Termination Event entitling either party to terminate some or all Affected Transactions. Partial termination is permitted because the impact on an event on each Transaction may differ from case to case (eg transactions forming part of a structured finance deal like a repack or a CDO) might not be easily replaced, so the disadvantages of terminating may outweigh the advantages.

As far as branches are concerned this is relatively uncontroversial, especially if yours is a multi-branch ISDA Master Agreement. But there is an interesting philosophical question here, for, without an express pre-existing contractual right to do so, a party may not unilaterally transfer its obligations under a contract to someone else. That, being a novation, requires the other party’s consent. This is deep contractual lore, predating the First Men and even the Children of the Woods. So if the Affected Party identifies an affiliate to whom it can transfer its rights and obligations, the Non-affected Party still may withhold consent. True, it is obliged to provide consent if its policies permit but — well — y’know. Polices? Given the credit department’s proclivities for the fantastical, it’s a fairly safe bet they’ll be able to find something if they don’t feel up to it.

That is to say, this commitment falls some wat short of the JC’s favourite confection: “in good faith and a commercially reasonable manner”.

Note also that if an Non-Affected Party does elect partial termination, the Affected Party has the right to terminate some or all of the remaining Transactions: this prevents Non-Affected Parties being opportunistic. Heaven forfend.

Section 6(b)(ii): Transfer to Avoid Termination Event

Things start to go a bit wobbly. You sense that ISDA’s crack drafting squad™ has been on the sauce, or marching powder or something, and became attached to the idea of trying to codify the unknowable future. It gets worse before it gets better but here the permutations are about the parties tax status: either the Tax law has changed for one or other party — a Tax Event — or a party has executed some fancy cross-border merger which has somehow changed its tax residence, status, or eligibility of favourable tax treatment: this is a Tax Event Upon Merger. Here, in essence, you have a little window to sort yourself out, if you hadn’t done that before the merger (isn’t that what Tax advisors are for, by the way?).

Tax Event Upon Merger is also apt to create magnificent rounds of three-dimensional ninja combat drafting, because there is an Affected Party, and a Burdened Party, and they are not ~ necessarily ~ the same, and that is even before you worry about what has happened if there is a Credit Event Upon Merger (could be, right? There is a merger... so why not?) and/or a Force Majeure going on at the same time.

In any case: the Affected Party of a simple Tax Event, or the Affected Party of a TEUM who is also the Burdened Party must try doggedly for twenty days to transfer its rights and obligations to an unaffected Office or Affiliate before it is allowed to trigger an Early Termination Date. In any case the innocent, Unaffected Party, has a varnished right to decline the transfer if it can’t trade with the designated transferee.

Comparisons

Template:Isda 6(b)(iv) comp

Summary

What a beast. If you track it through in Nutshell™ terms, it isn’t as bad as it looks, but you have the ISDA ninja’s gift for over-complication, and ISDA’s crack drafting squad™’s yen for dismal drafting, to thank for this being the trial it is.

To make it easier, we’ve invented some concepts and taken a few liberties:

“Unaffected Transaction”, which saves you all that mucking around saying “Transactions other than those that are, or are deemed, to be Affected Transactions” and so on;

Termination Event Notice: An elegant and self-explanatory alternative to “after an Affected Party gives notice under Section 6(b)(i)”.

We take it as logically true that you can’t give 20 days’ notice of something which you then say will happen in fewer than 20 days. Therefore, there is no need for all this “designate a day not earlier than the day such notice is effective” nonsense.

So with that all out the way, here is how it works. Keep in mind that, unlike Events of Default, Termination Events can arise through no fault of the Affected Party and, therefore, are not always as apocalyptic in consequence. Depending what they are, they may be cured or worked-around, and dented Transactions that can’t be panel-beaten back into shape may be surgically excised, allowing the remainder of the ISDA Master Agreement, and all Unaffected Transactions under it, to carry on as normal. So here goes:

Divide up the types of Termination Event

Tax ones: If a Tax Event or a TEUM where the party merging is the one that suffers the tax, the parties have a month to try to rearrange matters between them, their offices and affiliates to avoid the tax issue. Only once that has failed are you in Termination Event territory. See Section 6(b)(ii) and 6(b)(iii).

Non-Affected Party ones: If it’s a CEUM, an ATE or a TEUM where the Non-Affected Party suffers the tax, then if the other guy is a Non-Affected Party, then (whether or not you are) you may designate an Early Termination date for the Affected Transactions.

Illegality and Force Majeure: Here, if you are on a 2002 ISDA, there may be a Waiting Period to sit through, to see whether the difficulty clears. For Force Majeure Event it is eight Local Business Days; for Illegality other than one preventing performance of a Credit Support Document: three Local Business Days. So, sit through it. Why is there exception for Illegality on a Credit Support Document? Because, even though it wasn’t your fault, illegality of a Credit Support Document profoundly changes your credit assessment (in a way that arguably, even a payment or delivery obligation doesn’t), and that is the most fundamental risk you are managing under the ISDA Master Agreement.

General discussion

Template:M gen 2002 ISDA 6(b)(iv)

Details

MI by 2002
MI by 2002
MI by 2002
MI by 2002
==PART IV: BOILERPLATE MI by 2002
MI by 2002
MI by 2002

Comparisons

The first sentence is more or less the same in each version. Then the 2002 ISDA adds a lengthy disclaimer of any pre-contractual representations — presumably, not counting the express ones patiently documented in Section 3.

Summary

What you see is what you get, folks: if it ain’t written down in the ISDA Master Agreement, it don’t count, so no sneaky oral representations. But, anus matronae parvae malas leges faciunt, as we Latin freaks say: good luck in enforcing that if your counterparty is a little old lady.

Note also that liability for a fraudulent warranty or misrepresentation won’t be excluded. So if your oral representation or warranty is a bare-faced lie, the innocent party can maybe still rely on it in entering the agreement, even if it isn’t written down, though good luck parsing the universe of possible scenarios to figure out when that qualification might bite.

Smart-arse point: A warranty is a contractual assurance, made as part of a concluded contract, and cannot, logically, be relied on by the other party when entering into the contract. An assurance on which one relies when deciding to enter into a contract is a representation.

Confirmations

“This Agreement”, courtesy of how it is defined in Section 1(c), includes the ISDA Master pre-printed form, Schedule and each Confirmation entered into under it.

The entire agreement clause is legal boilerplate to nix any unwanted application of the parol evidence rule — to make sure one only cares for the four corners of the written agreement, and no extra-documentational squirrelling is allowed. Which might be a problem because the time-honoured understanding between all right-thinking derivatives trading folk is that the oral agreement, between the traders is the binding legal agreement, and not the subsequent confirmation, hammered out between middle office and operations folk after the trade is done. Hasten to Section 9(e)(ii) — the Confirmation is only evidence of the binding agreement. Could that be it?

General discussion

Template:M gen 2002 ISDA 9(a)

Comparisons

Template:Isda (b) comp

Summary

ISDA’s crack drafting squad™ takes a clause which didn’t really need to be said, and converts it into a monster. If we convert this to symbolic logic it must mean this:

Effective amendment or waiver =In writing AND [EITHER executed by each party OR confirmed by exchange of [EITHER Telex OR electronic message]]

“In writing” means recorded for posterity, in words ingestable by means of the eyes, as opposed to the ears. This is not the OED definition, I grant you — I made it up just now — but it zeroes in on the immutable fact that, whether it is on parchment, paper, cathode ray tube, LED screen or electronic reader, you take in writing by looking at it. Not “orally” — from the mouth — or for that matter, “aurally” — through the ears — nor, in the JC’s favourite example, via semaphore — by a chap waving flags from a distant hill — but in visible sentences, made up of visual words.

Sentences. Words. Mystic runes carved upon the very living rock. Anything else? Could “writing” include memes? GIFs? Emojis? We suppose so — but do you “write” them, as such? — but to the wider question “can communications apprehended visually but of a non-verbal nature be contractually significant?” the answer is undoubtedly yes.

Acceptance, to be legally binding, need not be “in writing”. Nor “orally”. Acceptance just needs to be clear. Whether one has accepted is a matter for the laws of evidence. There is little doubt that one who has signed, sealed and delivered a parchment deed by quill in counterpart has accepted its contents — it is about as good evidence as you could ask for, short of the fellow admitting it in cross-examination — but a merchant need not, and often does not, reach this gold standard when concluding commercial arrangements about town.

Who has not stumbled morosely into the newsagent of a Sunday morning, wordlessly pushed a copper across the counter and left with a copy of The Racing Post, not having exchanged as much as a glance with the proprietor? Do we doubt for an instant that a binding contract was formed during that terse interaction?

There is, in theory, a whole ecosystem of non-verbal communications — winks, nods, wags, shaken heads, facial tics and cocked eyebrows — and nor should we forget, those who stand on distant hills and communicate by smoke signal, Greek heroes who miscommunicate their safe return by sail colour or modern admirals who transmit instructions to the fleet using a flag sequence.

Any of these can, in theory, convey offer, acceptance and consideration as well can a written or oral communication.

Emojis

The King’s Bench of Saskatchewan — not an English court to be sure, but of persuasive value, especially when speaking this much sense — has recently affirmed the JC’s conviction about emojis 😬.

In an argument about whether a merchant was bound to supply a consignment of flax on the back of an exchange of SMS messages.

The plaintiff drew up a contract to purchase SWT 86 metric tonnes of flax from the defendant, wet-signed it, took a photo of the contract and texted the photo to the defendant with the text message: “Please confirm flax contract”.

The defendant texted back “👍”.

The defendant didn’t eventually deliver the flax, and by the time the plaintiff could source alternative flax prices had gone up. The plaintiff claimed damages.

The defendant argued the thumbs-up emoji simply confirmed that he received the Flax contract but was not acceptance of its terms. He claimed he was waiting for the full terms and conditions of the Flax Contract to review and sign. Partly on the basis of a prior course of dealing with deals done on monosyllabic text messages, the court wasn’t having it:

“This court readily acknowledges that a 👍 emoji is a non-traditional means to “sign” a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a “signature” – to identify the signator ... and as I have found above – to convey ... acceptance of the flax contract.

I therefore find that under these circumstances that the provisions of [the Canadian Sale of Goods Act 1978] have been met and the flax contract is therefore enforceable. ”

Comparisons

Section 9(c) is identical as between 1992 ISDA and the 2002 ISDA.

Summary

Netting and close-out

Why should this matter here? Well, because netting, in a word. Here the fabulous nuances of the ISDA Master Agreement come into play. Close-out netting — as we all know, a clever if somewhat artificial and, in practical application, quite tedious concept — is not something that just happens by operation of the common law. Set-off, which does, is a narrower and flakier thing requiring all kinds of mutuality that might not apply to your ISDA Master Agreement.

The contractual device of close-out netting, by contrast, relies on the patient midwifery of ISDA’s crack drafting squad™ and the sophisticated contrivances they popped into the ISDA Master Agreement: especially the parts that say all Transactions form a Single Agreement, and those long and dusty passages in Section 6 which painfully recount how one terminates those Transactions and nets down all the resulting exposures should things go tits up.

Now, it really wouldn’t do if one were found to have thrown those clever legal artifacts on the fire before seeking the common law’s help to manage your way out of a portfolio with a busted counterparty would it. Section 9(c) is there to avoid the doubt that you might have done so: Just because you’ve declared an Early Termination Date, that doesn’t mean all bets are off. Just the live Transactions.

As far as the JC can see, through his fogged-up, purblind spectacles, this doubt, like most, didn’t need avoiding and shouldn’t have been present in the mind of a legal eagle of stout mental fortitude: it is clear on its face that terminating a transaction under pre-specified mechanism in the contract is not to cancel the contract and sue for damages, but to exercise an option arising under it, and all your mechanical firepower remains in place.

Indeed, there is no mechanism for terminating an ISDA Master Agreement itself, at all. Even in peace-time. This has led at least one commentator to hypothesise that this proves that derivatives trading is all some kind of Illuminati conspiracy.

General discussion

Template:M gen 2002 ISDA 9(c)

Comparisons

This clause is identical in the 1992 ISDA and the 2002 ISDA.

Summary

Over the centuries the common law, as we know, has done a fine job of shaping and polishing a merchant’s remedies for breach of contract: — remedies which are, broadly, indifferent to what the contract happens to say.

The reason for that is simple: by the time a merchant comes to ask about its rights upon breach, the instrument that conferred them is broken.

Fruity expectations of a healthy, long and fecund forward relationship lie suffocating upon the salted earth. The contract is the proverbial “ex parrot”: it is no longer a reliable guide to how one should expect the other to behave. The defaulter is a defaulter and cannot be relied upon to do what she promised to do. So, nor is the aggrieved party be expected to carry on doggedly popping coppers in the slot: the common law asks that she conducts herself reasonably and with good faith in the circumstances; it does not demand a total want of common sense.

The sacred pact having fractured, it is for the court to draw upon its centuries of analogy to put the matters right.

It does that by reference to its own principles, not the contract’s: causation, contribution, foreseeability and determinacy of loss. the court applies these to the deal the suitor thought it had to work out a juridical compensation for its loss of bargain.

That is the magnificent furniture the laws of England bestow upon us. It seems counterproductive — passive aggressive, almost — for a party to insist, in detail, on what should happen its customer does not do it promises to do. Bloody-minded, almost.

Where the contract involves a bank, though — especially one that is lending you money — it is de rigueur. Banks like to rule out doubt, help themselves to extra rights: liens, set-off, netting of liabilities — banking contracts are a kind of research and development department where clever people contrive intricate clockwork escapements governing the grounds on which they deploy capital. Here “ex-parrotness” is the overriding mischief a lender seeks to manage, and legal eagles like to reinforce the ancient customary rules of contract.

It isn’t that the common law is no good; it is just that where you clearly foresee a specific breach, a contract can be better. The law of unintended consequences rules the world of finance, though, and it is not hard to imagine carefully drawn contractual terms working out worse than the general rules relating to fundamental breach. Hence this boilerplate: careful provisions designed to assist a wronged party should not be allowed to get in the way of general law of contract if it would work out to be better, and this slug of boilerplate is meant, to ensure — by means of contractual term — that they do not.

General discussion

Template:M gen 2002 ISDA 9(d)

Comparisons

But for some finicking around at the margin — allowing Confirmations to be exchanged by telex, fax or email; that kind of thing — the 2002 ISDA is substantially the same as for the 1992 ISDA

Summary

In which the ISDA Master Agreement deals with the pointless topic of counterparts, and the workaday one of Confirmations.

Section 9(e)(i) Counterparts

There is an impassioned essay about the idiocy of counterparts clauses elsewhere. For now, just know this:

Black’s Law Dictionary has the following to say on counterparts:

“Where an instrument of conveyance, as a lease, is executed in parts, that is, by having several copies or duplicates made and interchangeably executed, that which is executed by the grantor is usually called the “original,” and the rest are “counterparts;” although, where all the parties execute every part, this renders them all originals.”

Sometimes it is important that more than one copy of a document is recognised as an “original” — for tax purposes, for example, or where “the agreement” must be formally lodged with a land registry. But these cases, involving the conveyance of real estate, are rare — non-existent, indeed, when the field you are ploughing overflows with flowering ISDA Master Agreements, confidentiality agreements and so on. If yours does — and if you are still reading, I can only assume it does, or you are otherwise at some kind of low psychological ebb — a “counterparts” clause is as useful to you as a chocolate tea-pot.

Indeed: even for land lawyers, all it does is sort out which, of a scrum of identical documents signed by different people, is the “original”. This is doubtless important if you are registering leases in land registries, or whatever other grim minutiae land lawyers care about — we banking lawyers have our own grim minutiae to obsess about, so you should forgive us for not giving a tinker’s cuss about yours, die Landadler.

ANYWAY — if your area of legal speciality doesn’t care which of your contracts is the “original” — and seeing as, Q.E.D., they’re identical, why should it? — a counterparts clause is a waste of trees. If the law decrees everyone has to sign the same physical bit of paper (and no legal proposition to our knowledge does, but let’s just say), a clause on that bit of paper saying that they don’t have to, is hardly going to help.

Mark it, nuncle: there is a chicken-and-egg problem here; a temporal paradox — and you know how the JC loves those. For if your contract could only be executed on several pieces of paper if the parties agreed that, then wouldn’t you need them all to sign an agreement, saying just that, on the same piece of paper? And since, to get that agreement, they will have to sign the same piece of paper, why don’t you just have done with it and have them all sign the same copy of the blessèd contract, while you are at it?

But was there ever a logical cul-de-sac so neat, so compelling, that it stopped a legal eagle insisting on stating it anyway, on pain of cratering the trade? There are little eaglets to feed, my friends.

Section 9(e)(ii) Confirmations

“Trade” versus “confirmation”: celebrity death-match

If a trader agrees one thing, and the confirmation the parties subsequently sign says another, which gives? A 15 second dealing-floor exchange on a crackly taped line, or the carefully-wrought ten page, counterpart-executed legal epistle that follows it?

The original oral trade prevails. As to why — we address that in the premium section.

Dare we mention ... email?

Note also the addition of e-mail as a means of communication to the 2002 ISDA (email not really having been a “thing” in 1992). This caused all kinds of fear and loathing among the judiciary, when asked about it, as can be seen in the frightful case of Greenclose v National Westminster Bank plc.Oh dear, oh dear, oh dear.

Timely confirmation regulations and deemed consent

Both EMIR and Dodd Frank have timely confirmation requirements obliging parties to have confirmed their scratchy tape recordings within a short period (around 3 days). This fell out of a huge backlog in confirming structured credit derivatives trades following the Lehman collapse.

Roger Moore indahouse

Lastly, a rare opportunity to praise those maestros of legal word-wrangelry, ISDA’s crack drafting squad™. In Section 9(e)(ii), they contemplate that one might agree a Transaction “orally or otherwise”. This is a smidgen wider than the usual legal eagle formulation of orally or in writing. It shows that while the swaps whizzes were conservative about how to close out a Transaction, when putting one on you are constrained only by the bounds of your imagination and the limits of interpersonal ambiguity: not just written words, nor even oral ones, but the whole panoply of possible human communications: semaphore, naval flags, Morse code, waggled eyebrows, embarrassed smiles and any other kinds of physical gesture.

General discussion

Template:M gen 2002 ISDA 9(e)

Comparisons

This clause is identical in the 1992 ISDA and the 2002 ISDA.

Summary

Waiver: a place where the laws of the New World and the Old diverge. Does one really need a contractual provision dealing with the consequences of a fellow’s good-natured indulgence when carrying on commerce under an ISDA Master Agreement? Those with an English qualification will snort, barking reference to Hughes v Metropolitan Railway and say this Section 9(f) is inconsequential fluff that goes without saying; those acquainted with the Uniform Commercial Code and the monstrous slabs of Manhattan will tread more carefully, lest they create a “course of dealing”.

Since the ISDA Master Agreement was designed with either legal system in mind, ISDA’s crack drafting squad™ came up with something that would work in either. To be sure, it is calculated to offend literary stylists and those whose attention span favours minimalism amongst those who ply their trade in the old country, but it does no harm.

General discussion

Template:M gen 2002 ISDA 9(f)

Comparisons

This clause is identical in the 1992 ISDA and the 2002 ISDA.

Summary

So suddenly, in Section 9(g) of all places, the members of ISDA’s crack drafting squad™ wake up out of their collective fever dream, and this is what they say: It’s like, “okay, so we wrote them; we did put them here — hands up, we admit it — but we don’t mean anything by them”. And what is a fellow to make of the headings before Section 9 that, short days ago, being a logical fellow, I read, enjoyed and imbued with symbolic meaning? Am I supposed to just throw that crystalline construct away now? It just seems such a waste.

Don’t you just love lawyers?

General discussion

Template:M gen 2002 ISDA 9(g)

Details

MI by 2002
MI by 2002
MI by 2002
MI by 2002
MI by 2002

Comparisons

Template:M comp disc 2002 ISDA Additional Representation

Summary

Template:M summ 2002 ISDA Additional Representation

General discussion

Template:M gen 2002 ISDA Additional Representation

Comparisons

Numbering Discrepancy: Note the numbering discrepancy in Section 5(b) between the 1992 ISDA and 2002 ISDA. This is caused by a new 5(b)(ii) (Force Majeure Event) in the 2002 ISDA before Tax Event, which is thus shunted from Section 5(b)(ii) (in the 1992 ISDA) to Section 5(b)(iii) (in the 2002 ISDA).

Additional Termination Events: Other than the numbering discrepancy and a daring change of a “shall” to a “will”, Section 5(b)(vi) of the 2002 ISDA is the same as Section 5(b)(v) of the 1992 ISDA. That said, ATEs are likely to be the most haggled-over part of your ISDA Master Agreement.

Summary

Additional Termination Events are the other termination events your Credit department has dreamt up for this specific counterparty, that didn’t occur to the framers of the ISDA Master Agreement — or, at any rate, weren’t sufficiently universal to warrant being included in the ISDA Master Agreement for all. While the standard Termination Events tend to be “non-fault” events which justify termination of the relationship on economic grounds, but not on terms necessarily punitive to the Affected Party, Additional Termination Events are more “credit-y”, more susceptible of moral outrage, and as such more closely resemble Events of Default than Termination Events.

Common ones include:

• NAV triggers (for hedge funds)
• Key man provisions (for hedge funds)
• Investment manager insolvency or loss of licence
• Parent divestment (where counterparty is a financing subsidiary)

There is a — well, contrarian — school of thought that Additional Termination Events better serve the interests of the Ancient Guild of Contract Negotiators and the Worshipful Company of Credit Officers than they do the shareholders of the institutions for whom these artisans practise their craft, for in these days of zero-threshold CSAs, the real credit protections in the ISDA Master Agreement are the standard Events of Default (especially Failure to Pay or Deliver and Bankruptcy).

It’s a fair bet no-one in the organisation will have kept a record of how often you pulled NAV trigger. It may well be never.

“Ahh”, your credit officer will say, “but it gets the counterparty to the negotiating table”.

Hmmm.

General discussion

Template:M gen 2002 ISDA Additional Termination Event

Comparisons

Not even ISDA’s crack drafting squad™ could confect something worthwhile to say which might improve this Spartan piece of text. But note the concept of Affected Party is sprayed liberally throughout Section 5(b), and it means something different in almost every context so you’re guaranteed to have fun there.

Elsewhere there is much monkeying around as regards the concept of Illegality, particularly insofar as it relates to Credit Support Documents, and the newly introduced Force Majeure.

Summary

The Affected Party is the one who is subject to a Section 5(b) Termination Event, as opposed to the perpetrator of a Section 5(a) Event of Default — thus one of a marginally less opprobrious character, seeing as Termination Events are generally not considered to be one’s fault as such, but just regrettable things that happen that no-one expected, or wanted, but bring what was once a beautiful relationship to an end.

It’s not you, it’s — well, it’s not me either — it’s just that confounded tax event that occurred upon your recent merger.

Note that, in its wisdom, ISDA’s crack drafting squad™ chose not to have a generic term for the sort of person who is subject to either a Termination Event or an Event of Default, so there is much “Defaulting Party and/or Affected Party, as the case may be” sort of malarkey. This depresses we prose stylists, but ISDA’s crack drafting squad™ has never cared about us, so we should hardly be surprised.

Practical differences between “Affected Party” and “Defaulting Party”

What is the practical, economic difference between being closed out on the same Transaction for an Event of Default and a Termination Event?

This is something that all ISDA ninjas know, or sort of intuit, in a sort of semi-conscious, buried-somewhere-deep-in-the-brain-stem kind of way, but they may mutter darkly and try to change the subject if you ask them to articulate it in simple English.

To be fair the topic might be chiefly of academic interest were it not for the unfortunate habit of the same “real world” event potentially comprising more than one variety of termination right. This leads to some laboured prioritisation in the ISDA, and sometimes some in the Schedule too. What if my Tax Event upon Merger is also a Credit Event Upon Merger and, for that matter, also a Force Majeure Event? That kind of question.

General discussion

The Definition of 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 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 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 Event of Default, it is the Non-Defaulting Party at all times (since on the theory of the game, the 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 Event of Default is always optimal for the Innocent Party, since it will always be the Determining Party.

One Affected Party

Where the terminating impetus is not so outrageous as to qualify as an 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 Illegality or a Force Majeure Event, in which case there is a rider in Section 6(e)(ii)(3) applies and the 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 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 Termination Events; 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 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 Terminated Transaction” — throws it into the ring and the 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 Transactions

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

In the heyday of ISDA negotiation just who was the Affected Party and how one should value and terminate an Affected Transaction used to be much more of a source of controversy than it is today.

This might be a function of the market’s general move to the 2002 ISDA closeout methodology, being far less fraught and bamboozling then the one in the 1992 ISDA, refraining as it does from absurdities like the First Method and alternative Market and Loss methods of valuing replacement transactions. Even those who insist on staying with the 1992 ISDA — Hello, Cleveland! — are often persuaded to upgrade the closeout methodology.

It might also be that the specific expertise as to what happens in a close out has dissipated over the years as swap dealers and investment managers have outsourced and downskilled their negotiation functions.

But the JC likes to think that in this mature market, the commercial imperative plays a part here. Termination Events come in two types: catastrophic ones, which signal the end of the relationship — and usually the ongoing viability of one of the counterparties — altogether; and Transaction-specific ones, which no-one intended or wanted, everyone regrets, but which will soon be water under the bridge, for parties who will continue to trade new derivatives into glorious, golden perpetuity.

Now any swap dealer who regards a Transaction-specific Termination Event as an opportunity to gouge its counterparty can expect a frosty reception next time its salespeople are pitching new trading axes to the CIO.

On the other hand if, when your valuation reaches her, the CIO is wandering around outside her building with an Iron Mountain box, she will be less bothered about the wantonness of your termination mark — it being no longer her problem — and as far as she does care about it all, will console herself with the reality that you are not likely to see much of that money anyway once her former employer’s insolvency estate has been wound up.

Comparisons

The provisions are identical but for reference to the newly added Force Majeure Termination Event and also a cheeky caveat relating to an Illegality or Force Majeure which affects only the Credit Support Document, and here the “leave no detail, however tiresome, unconsidered” department of ISDA’s crack drafting squad™ caters for the eventuality that your Credit Support Document provides credit support for some, but not, all Transactions.

Summary

Seeing how third party credit support generally works under an ISDA Master Agreement — it only comes into play once Transactions have been closed out, and there are no Transactions left, Affected or otherwise this does seem a rather fussy detail; all the more so now in the age of regulatory variation margin. I mean, who provides credit support for individual Transactions under a master agreement specifically designed to achieve cross-transactional closeout netting?

General discussion

Template:M gen 2002 ISDA Affected Transactions

Summary

Affiliate is potentially wide: it could capture, for example, special purpose vehicles whose shareholding is owned by the same corporate service provider, or separate stand-alone hedge funds managed by the same administrator or investment manager.

An “affiliate” is really not a complicated idea in the abstract, yet in the world of commercial contracts, our learned friends rejoice in overdetermining it all the same. For these men and women, a “affiliate” of an undertaking could be:

• Parent: its parent or holding company, which holds all or a majority of its ordinary share capital — often abbreviated as a “holdco”
• Child: its subsidiary — a company the ordinary share capital of which it holds all or a majority
• Sibling: a company in common ownership with the corporate being; that is to say, a company that shares the same parent or holding company.

And that is about it. Pedants will be anxious to point out that, shares being the divisible ownership units that they are, and different degrees of control and voting rights attaching to different classes of share, there are degrees of ownership, and affiliation, and some imply more connectedness than others. Any confusion is usually resolved by pointing at the definition of “subsidiary” and “holding company” in the Companies Act, or similar legislation in a jurisdiction near you. The ISDA Master Agreement does a reasonably neat job of capturing the above by reference to the majority of voting control.

General discussion

Template:M gen 2002 ISDA Affiliate

Comparisons

The “Agreement” is, broadly, the ISDA Master Agreement, the Schedule, any 1995 CSA and, in the context of any Transaction, its Confirmation. It generally would not include a Credit Support Document (except to the extent you treat your 1995 CSA, rightly or wrongly, as a Credit Support Document.

The ISDA Master Agreement

The ISDA Master Agreement is the basic framework which applies to anyone who touches down on planet ISDA. There are three existing versions:

• the state-of-the-art 2002 ISDA;
• the still-popular-with-traditionalists-and-Americans 1992 ISDA, and
• the all-but-retired-but-don’t-forget-there-are-still-soldiers-in-the-Burmese-jungle 1987 ISDA
• the interesting-only-for-its-place-in-the-fossil-record-and-witty-acrostic 1985 ISDA Code; and
• there isn’t a 2008 ISDA. That’s a little running JC in-joke.

All three versions have a tri-partite form: Pre-printed Master, Schedule and — well, this is controversial: for is it, or is it not, part of the ISDA Master Agreement? — Credit Support Annex. {{isda 1(c) summ {{{1}}}|{{{1}}}}}

General discussion

Template:M gen 2002 ISDA Agreement

Comparisons

This clause being new to the 2002 ISDA, there is no equivalent in the 1992 ISDA.

Summary

Truly from the I’m sorry I asked file — almost in the shoot me file. This whole game of pan-dimensional chess, with six different Applicable Close-out Rates to apply in different circumstances, is all just to work out how to accrue interest on Unpaid Amounts and Early Termination Amounts during the close-out process. Considering that the said payer of this Applicable Close-out Rate is, Q.E.D., a dead duck at the time, and is unlikely to be able to pay much of anything, let alone elevated penalty interest, it really should not have been this hard.

You get a strong sense that the pragmatists of ISDA’s crack drafting squad™ — if there are any — had well and truly tuned out and gone to the bar by the ’squad got to this definition. Looking on the bright side, at least it doesn’t mention LIBOR.

Non-Default Rate

To compare with the definition of “Default Rate”:

“Default Rate” means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum. [emphasis added]

Since there is no suggestion of deftly placing one’s thumb on the scale, as there is for the Default Rate, we need not have, here, a saucy discussion about the risks of being seen as a penalty.

General discussion

Template:M gen 2002 ISDA Applicable Close-out Rate

Comparisons

Template:M comp disc 2002 ISDA Applicable Deferral Rate

Summary

Template:M summ 2002 ISDA Applicable Deferral Rate

General discussion

Template:M gen 2002 ISDA Applicable Deferral Rate

Comparisons

Those with a keen eye will notice that, but for the title, Section 6(a) of the 2002 ISDA is the same as Section 6(a) of the 1992 ISDA and, really, not a million miles away from the svelte form of Section 6(a) in the 1987 ISDA — look on that as the Broadcaster to the 1992’s Telecaster.

Summary

HAL 9000: Just a moment — just a moment — I just picked up a fault in the AET-87 Unit.

Frank Poole: What is it?

HAL 9000: It’s a device for optimising regulatory capital, but that’s not important right now.

David Bowman: What’s the problem, HAL?

HAL 9000: It’s going to go one hundred per cent. failure, within 72 hours.

Poole: Surely, you can’t be serious?

HAL 9000: I am serious. And don’t call me “Shirley”.

Bowman: (sticking to the script) I don’t know what you’re talking about, HAL?

Cue musical introduction

HAL9000: Well, I’ll tell you.

Chorus: He’s going to tell!
He’s going to tell!
He’s going to tell!
He’s going to tell! —

Poole: Stop that! Stop that! No singing!

Carries on for three hours in this vein

—Monty Python and the Magnetic Anomaly from Airplane!

Automatic Early Termination — colloquially, “AET”, but not to be confused with “ATE” (Additional Termination Event) or “ETA” (Early Termination Amount) — is an odd, feared and misunderstood concept buried at the back end of Section 6(a) (Right to Terminate Following Event of Default).

In a document stuffed with arcanities, Automatic Early Termination is especially abstruse, so if you are hitting this article cold then, firstly: what the hell are you doing; and secondly some background reading is in order:

Recommended background reading

• Bankruptcy phase transition: The difference between insolvency and bankruptcy and why the phase transition between them is a weird dreamtime that freaks derivatives lawyers out.
• Bankruptcy shenanigans and why they present a unique problem for derivatives counterparties that normal creditors are less bothered about.
• Single Agreement: The unbearable weirdness of ISDA’s single agreement concept.
• Regulatory capital: The rules on how much capital a regulated financial institution is required to hold, and how that is calculated.
• Closing out an ISDA: The law and lore of closing out an ISDA
• Flawed asset: ISDA’s notorious “flawed asset” provision: Section 2(a)(iii).

Automatic Early Termination provision is triggered when a party to whom it applies suffers an in-scope Bankruptcy Event of Default. If it is triggered, all outstanding Transactions are instantly and automatically terminated, without the need for any action by — or even the knowledge of — the Non-Defaulting Party. This usually means instantly, but in one case, it is even quicker than that.

If the Bankruptcy event is the presentation to the court by a creditor of a formal petition seeking the entity’s bankruptcy under Section 5(a)(vii)(4) — let us call this a “bankruptcy petition”, some creative warping of lexophysical swaptime is required. We will discuss this at some length and with wistful pedantry, in the premium content section.

In taking things out of the Non-Defaulting Party’s hands, AET subverts the normal order of things under the ISDA Master Agreement. Normally, the Non-Defaulting Party is in control. It may, but need not, call an Event of Default if the circumstances justifying one exist. AET is, well, automatic. It even obliterates the Non-Defaulting Party’s right to waive designation of an Event of Default, since by the time it is in a position to do so, the Event Default has already been declared.

(Could a NDP pre-waive in anticipation? See “Anticipatory waiver?” in the premium section.)

JC’s view is that Automatic Early Termination is a bad solution to an unlikely problem, but since it is embedded in every ISDA on the planet, and remains present in the minds of those who mandate capital calculations, we are stuck with it.

The theory

“Formal bankruptcy is a “phase transition”: the whole “legal context” surrounding a company changes. Erstwhile certainties vanish: normal rules of contract, debt and credit are suspended; in their place arise uncontrollable vagaries. The court appoints a bankruptcy administrator and invests her with wide, nightmarish discretions to do as she pleases, within reason, to sort out who gets what while ensuring the right thing is done by all the bankrupt’s creditors, customers, employees and, if there is anything left, shareholders. All, therefore, must fall upon her mercy”

—The phase transition of bankruptcy

Where a Defaulting Party’s bankruptcy regime allows its administrator to suspend its contractual terms or cherry-pick which of its Transactions to honour, it would help the Non-Defaulting Party if the ISDA were to automatically terminate before that phase transition occurred. To be safe, termination should happen at the exact moment — or even an infinitesimal moment before — that bankruptcy regime comes to life.

Bankruptcy shenanigans could affect a Non-Defaulting Party’s rights in at least two ways: Firstly, it may prevent it closing out Transactions at all. The bankruptcy administrator may have the discretion to affirm or avoid individual Transactions. This bigly messes with the fundamental philosophy of the ISDA Master Agreement.

Secondly, it may impact netting rights: a party having exercised its close-out right, ISDA’s “single agreement” operates to net all Transaction exposures down to a single sum. If a bankruptcy administrator is allowed to enforce some Transactions and set aside others — that is, to “cherry-pick” — that netting right is compromised, especially if the administrator has tactically DK’d only your profitable trades.

History

We rarely look back to the 1987 ISDA these days; few Burmese Junglers remain out there fighting the good fight, but sometimes the fossil record gives us purchase on the state of modern biology all the same. So it is with Automatic Early Termination which was introduced, uncredited, in the 1987 ISDA.

Bear in mind the broad sweep of three historical trends that converged in the 1980s.

Financialisation

First, the rapid onset of financialisation of, well, everything, due to parallel developments in information technology. Through the Seventies and Eighties, Western markets acquired the mental habits and technical systems they needed to look at financial risk in a much more detailed, segmentable way: as “substrate-neutral” derivatives of real-world propositions.

Financial instruments traded electronically. Increasingly, institutions modelled their risk with computers. They unbundled big, organic, ineffable risks into discrete tradable components: first, market risk and credit risk. Then into more esoteric measures: volatility. Liquidity. Convexity. Correlation. Credit and debt value.

At the same time, the market developed the legal and contractual tools to implement this new way of thinking about risks. Principle among them was a new class of bilateral financial contracts unlike anything the world had seen before, in which the usual master-slave relationship between creditors and debtors and between bankers and their customers were rendered — apparently — moot. There was no lender or borrower. The parties were equals: traders.

The ISDA Master Agreement was at the vanguard of these new bilateral contracts.

At the same time, powered by the same irrepressible forces of modernity, the market internationalised. Reducing financial instruments to electronic impulses made cross-border trade easier. While central banks could manage prudential supervision in their own jurisdictions, it was difficult for them to do it across global financial markets where different regulatory regimes presented all kinds of arbitrage opportunities.

New capital regulation

These developments in banking and market technology called for a more sophisticated framework for managing institutional risk in the global markets. Banks were increasingly interconnected, both across exchanges and in private over-the-counter markets, and the speed at which they traded, and at which trading values fluctuated, meant there was heightened systemic risk should major institutions get into trouble. The Latin American debt crisis was a case in point. Even smaller participants could have a disproportionate effect on system stability. We saw this, a bit later, when the brainbox-stuffed pioneering relative value arbitrage hedge fund Long Term Capital Management blew up and almost took Western banking civilisation with it. Some would say that would have been no bad thing.

At the same time the innovative financial instruments, which tended to be leveraged and shared few of the characteristics of traditional financial instruments, meant effective capital ratios at financial institutions declined over the 1980s. It became apparent that the worst-case loss scenario for a master trading agreement like the ISDA was orders of magnitude greater than that presented by exposure to, for example, a syndicated loan. As a result, the Basel Committee on Banking Supervision introduced harmonised global standards for the capital treatment of financial instruments, including these new swap contracts. These rules, now known as Basel I, were first published in 1986. The following year, the 1987 ISDA arrived.

Corporate resolution didn’t change

While there was a good deal of harmony in the international capital markets, many domestic bankruptcy regimes — which were targeted at small and medium-sized enterprises and typically did not have such an international focus — did not similarly change or update.

Swaps remained an arcane part of the international capital markets. They were not relevant to the SMEs. Companies regulators, assignees and administrators did not well understand them, or how they worked. Having local tax and employment liabilities and “trade credit” arrangements in mind, Bankruptcy regimes tended to confer broad discretions on receivers and liquidators to ensure fair outcomes for all claimants upon a company’s resolution.

But broad discretion means lack of certainty, and financial markets do not like uncertainty. Especially not for highly unusual, levered arrangements like swaps, which are not by nature creditor-debtor arrangements. Should an administrator try to “cherry-pick” the in-the-money transactions in a swap portfolio, the implications for swap dealers — who had only entered into them at all on the assumption that all exposures, positive and negative, would net down to a single number — could be far worse, and far more volatile, than the corresponding risks presented by an ordinary loan or trade invoice.

Basel I addressed this “local insolvency risk” by requiring swap dealers to obtain written and reasoned legal opinions that, under local bankruptcy rules, their master agreements could not be cherry-picked in this way. that the “single agreement” concept would work, and their rights to apply close-out netting would be respected.

And this is where the phase transition into bankruptcy becomes important. Typically, while a company is still solvent and trading in the ordinary course, its master trading agreements may be enforced, and netted, according to their terms. It is only at the point of formal bankruptcy that the phantom shenanigans of wide-ranging equitable discretion hove into view. In some jurisdictions, the point at which everything changes is a split second, and getting the right side of it makes all the difference.

Insolvency versus bankruptcy

As we note elsewhere, there is common confusion between the accounting status of “insolvency”, which has no formal legal status and therefore makes no particular difference to the effectiveness of netting, and the legal status of “bankruptcy”, which does. Mere insolvency may lead to bankruptcy, but need not: they are different concepts and have different legal implications (in that bankruptcy has some, insolvency does not). Only once you are into formal bankruptcy are bankruptcy shenanigans on the cards.

ISDA’s definition of “Bankruptcy” somewhat jumbles the concepts up. Some ISDA Bankruptcy events (especially cashflow/balance sheet insolvency and composition with creditors) are “pre-phase transition events”, are not really observable, nor are they accompanied by formal changes in the application of laws of contract and should not trigger Automatic Early Termination.

1987: a blunt instrument

In the 1987 ISDA they do anyway. Automatic Early Termination applies across the board, to all Bankruptcy events, and all counterparties: it is not even an optional election, to be engaged judiciously when needed. It just sits there and applies across the board if any Bankruptcy Event of Default should be declared. You could engineer your Schedule to disable it, but this would require initiative.

This presented a real risk of indeterminacy, where the facts triggering an insolvency-style Bankruptcy were not public or even easily determinable. How are you meant to know whether your counterparty is balance sheet insolvent? Even for the company’s own accountants, this is more a matter of art than science. If mere insolvency triggered AET, it would be impossible to know whether a given ISDA was alive or dead. And that is before you even consider the impact of Section 2(a)(iii).

There is this weird thing: Automatic Early Termination could be triggered without notice, action or knowledge, and that would trigger a section 2(a)(iii) suspension, also without notice, action or knowledge. In that case, it is hard to see what to make of unexplained non-performance by your counterparty under the contract. Was it bankrupt? Or did it think you were bankrupt?

1992: Slow reverse-ferret

The history since 1987 has been to slow-walk AET back — not nearly fast enough, in this commentator’s opinion — from that highly unsatisfactory epistemological state. By 1992, AET excluded the “soft” economic insolvency events and was limited to circumstances with a live risk of bankruptcy shenanigans.

The 1992 ISDA also converted AET into an optional election in Part 1 of the Schedule. For most parties, in most jurisdictions, it stays off.

2002: grace periods tighten

In 2002 a further refinement was implemented in the definition of “bankruptcy petition”. ISDA’s crack drafting squad™ split Section 5(a)(vii)(4) in two: a bankruptcy petition instituted by a regulator is not subject to a grace period; one instituted by anyone else — such as a creditor — would only mature into an Event of Default if ordered by the Court, or not otherwise discharged within a 15-day grace period — down from the 30 days in the 1992 ISDA.

If a regulator is taking formal action against you, the game is certainly up. A grace period here serves no real purpose. A mere creditor doing so may be little more than a rather brusque debt-collection tactic: it may not indicate any genuine concern about a party’s ability to pay its debts, but rather be a pointed hurry-up. In that case, a bankruptcy petition can be fairly easily discharged. Hence the grace period.

Few and far between

As it stands there are only a few counterparty types in a few jurisdictions where the conditions for AET prevail. There are not many because — let’s be clear, here — AET is a bit of try on: any self-respecting netting-hostile bankruptcy regime ought to see straight through it.

It is, after all, a piece of time-travelling contractual magic — it deems Transactions to have terminated, without anyone’s knowledge or action, the instant before the event that, on expiry of a grace period would later trigger it, to avoid the ambit of discretionary rules designed to ensure fairness and prevent just that kind of preference. Expecting this to work very often seems a bit optimistic.

There is a more benign view, but it is still a bit hopeful: Automatic Early Termination helps deliver the appropriate outcome, dispelling residual doubt about ambiguous or untested regulatory provisions that were never intended to allow bankruptcy shenanigans, but that were crafted without the sui generis use case of the master trading agreement in mind. On this view, AET is a sort of “better be safe than sorry” gambit.

Then there is a pragmatic view. This is blunter: ISDA Master Agreements once were weird innovations that bamboozled and (wrongly) outraged bankruptcy administrators. Nowadays, they are not. Everyone knows what ISDAs are, why they net, why the “single agreement” concept is a sensible plank in the capital structure of the financial system, and why the bankruptcy shenanigans AET seeks to avoid would not produce a fair result for anyone.

This is all well and good. But if, unwittingly, Automatic Early Termination now creates practical risks where once it avoided theoretical ones, it still should be a source of concern. In JC’s view, it does.

We will talk about that at great length in the premium section.

Tedious but harmless drafting tweaks

Even for the Non-Defaulting Party, AET is a necessary evil. It leaves the Non-Defaulting Party at risk of being un-hedged on a portfolio of Transactions that automatically terminated effective as of a Bankruptcy event without the NDP knowing that the Bankruptcy event had happened. The NDP may want to capture the market risk between the Bankruptcy event and the date on which they should have known about it, and factor that into the Close-out Amount. If they do, expect to see language like the below.

If you are an AET counterparty, your credit officer may bridle at the sight of this, but you can reassure her that at any point where this language comes into play she will be wandering around outside in a daze clutching an Iron Mountain box full of gonks, comedy pencils and deal tomb-stones, and contemplating a career reboot as a maths teacher, so she shouldn’t really care anyway.

Adjustment for Automatic Early Termination: If an Early Termination Date occurs following an Automatic Early Termination event, the Early Termination Amount will adjusted to reflect movements in rates or prices between that Early Termination Date and the date on which the Non Defaulting Party should reasonably have become aware of the occurrence of the Automatic Early Termination.

Switzerland

Switzerland is — isn’t it always? — different, and a good place to go right now would be the Swiss bankruptcy language page. Switzerland itself is also a good place to go, especially in the skiing season. The JC loves Wengen.

AET under the 1987 ISDA

Note the somewhat difficult position for AET under the 1987 ISDA - a fuller discussion at that article - which was part of the reason for the move to the 1992 ISDA in the first place.

Comparisons

Template:M comp disc 2002 ISDA Burdened Party

Summary

Template:M summ 2002 ISDA Burdened Party

General discussion

Template:M gen 2002 ISDA Burdened Party

Comparisons

Template:M comp disc 2002 ISDA Change in Tax Law

Summary

So one mild observation here is that this definition of a “Change in Tax Law” does not specifically mention, you know, tax per se. Which at first glance is odd.

This transpires not to matter, though, seeing as Change in Tax Law appears only twice in the 2002 ISDA, and in each case the context in which it appears is very specific to tax. They are:

• Section 2(d)(4)(B) (which deals with exclusions to the general requirement to gross up for Indemnifiable Taxes; and
• Section 5(b)(iii) (Tax Events), defining things that count as Tax Events by making an Affected Party more likely to suffer an Indemnifiable Tax.

The provisions surrounding gross up and termination and Indemnifiable Taxes are some of the most (linguistically) complicated in the ISDA Master Agreement, by the way.

General discussion

Template:M gen 2002 ISDA Change in Tax Law

Comparisons

ISDA’s crack drafting squad™ introduced the Close-out Amount into the 2002 ISDA to correct the total trainwreck of a close-out methodology set out in the 1992 ISDA.

So the dirty secret is that there isn’t a “Close-out Amount” as such under a 1992 ISDA (or the 1987 ISDA) but, in places on this wiki, we’ll refer to one anyway, because it is better, more elegant, more stylish prose than

“... the amount determined following early termination of a Terminated Transaction using Market Quotation or Loss (as the case may be) and the Second Method, seeing as no-one in their right mind would agree to the First Method, under the 1992 ISDA”.

In the context of a 1992 ISDA that is what we mean by “Close-out Amount”.

Key differences

Well, there are some significant differences between Close-out Amount and Loss/Market Quotation under the 1992 ISDA, and we go into these in more detail in the premium section Close-out Amount v Loss/MQ showdown.

Summary

In the “good old days” of the 1992 ISDA, you valued Terminated Transactions according to Market Quotation or Loss and those un-intuitive and — well,in the case of the first, flat-out nutso — “First” and “Second” Methods. There is a “Settlement Amount” concept under the 1992 ISDA, but it only really relates to Market Quotation.

Note the prominent requirement to achieve a “reasonable” (1992 ISDA) or “commercially reasonable” (2002 ISDA) result. On what that latter lovely expression means see Barclays v Unicredit. Spoiler: it’s basically good for brokers, as long as they aren’t being total dicks.

On the difference between an “Early Termination Amount” and a “Close-out Amount”

Regrettably, the 1992 ISDA features neither an Early Termination Amount nor a Close-out Amount. The 2002 ISDA has both, which looks like rather an indulgence until you realise that they do different things.

A Close-out Amount is the termination value for a single Transaction, or a related group of Transactions that a Non-Defaulting Party or Non-Affected Party calculates while closing out an 2002 ISDA, but it is not the final, overall sum due under the ISDA Master Agreement itself. Each of the determined Transaction Close-out Amounts summed with the various Unpaid Amounts to arrive at the Early Termination Amount, which is the total net sum due under the ISDA Master Agreement after the close-out process. (See Section 6(e)(i) for more on that).

General discussion

For a step-by-step guide to closing out an ISDA Master Agreement see Section 6(a).

The 2002 ISDA does away with specific references to Market Quotation and “Reference Market-makers” but they are still, somewhat, germane thanks to the references to “quotations (either firm or indicative) for replacement transactions supplied by one or more third parties”.

The quaint notion that a dealer poll would, at the point when needed, actually do anything was laid to rest in the 2023 case of Lehman Brothers International (Europe) v AG Financial Products, Inc. which involved the closeout and valuation of a 1992 ISDA following Lehman’s collapse.

This case is an object less on for many unacknowledged facts about derivatives trading — such as that cases involving seemingly tried and tested aspects of close-out methodology get litigated at all, let alone that they take 15 years to get to judgment — but the standout point is the forlorn pointlessness of convening dealer polls.

From Crane J’s factual summary:

In accordance with its responsibilities under the ISDA Master Agreement, following its declaration of an event of default, Assured engaged the assistance of Henderson Global Investors, Ltd. (Henderson), to conduct an auction so that it could satisfy the ISDA Market Quotation process. Henderson contacted 11 potential bidders in advance of the auction that took place on September 16, 2009. Not one bid was received.

LBIE did manage to get some indicative bids that were, expert witnesses thought “indicative market data of where these transactions, these underlyings would be trading at that stage on termination date”. But not one of them was prepared to make a binding offer, and the most fulsome indicative bid was disclaimed up the wazoo:

“This is not investment advice of any kind and we do not purport any degree of accuracy in these levels.”

Useless, you would think, as an input in determining a fair market level. Indeed, internal LBIE emails — kids, if you learn one sodding lesson from the history of financial market disaster let it be “don’t put your darkest thoughts in emails to your buddies” — suggested they only wanted indicative bids to encourage other banks (many may have had similar trades on their books as LBIE), to make any bid, so that LBIE could then argue there was a market price:

“any color is good color to us and [JP Morgan employee] is lobbying for [JP Morgan’s US trading team] to at least put a number on it even if it is zero”.

Crane J notes, somewhat drily: “This raises the concern that LBIE’s goal, with respect to the indicative bids, was to make these trades seem as worthless as possible to then be able to collect the most from Assured in a lawsuit.”

So here are some things to bear in mind before reaching for a dealer poll to unblock a negotiation that is stuck on valuation:

Firstly, at the point you are likely to be arguing about it, everyone’s hair — yours, the counterparty’s and the rest of the market’s — hair will be on fire. Prices will be yoyoing around and most people will be focussed on their own book and won’t care about yours. Imagine your reference dealer is sitting on one of those mechanical bucking broncos. At the moment you ask for a firm bid on your portfolio — that, by the way, you don’t intend to hit — someone switched the bronco on full.

Secondly, since it has nothing to gain from providing a price — you want “price discovery”, not an actual trade, remember — no dealer in its right mind will give you one. Best case scenario it is distracted from managing its own book while bronco machine is on max. Less edifying ones are that it could get called as a witness in the litigation that is bound to follow or, God forbid, joined as a defendant in it. All your incautious bloomies are suddenly discoverable before an unsympathetic court.

Comparisons

Template:M comp disc 2002 ISDA Confirmation

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You might wonder whether this term really needed definition, and what calamity might have befallen the derivatives world had it not been created. Go on; go on, oh ye mighty ninjas: write in and tell me. I’m all ears.

Summary

If you are the sort of person you wonders whether the word “consent” includes permission, approval, regulatory authorisation or other general expression of acquiesence, and especially if you conclude it might not, this is the clause for you.

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Template:M gen 2002 ISDA consent

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Template:M comp disc 2002 ISDA Contractual Currency

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Template:M summ 2002 ISDA Contractual Currency

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Template:M gen 2002 ISDA Contractual Currency

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Template:M comp disc 2002 ISDA Convention Court

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Template:M gen 2002 ISDA Convention Court

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Numbering Discrepancy: Note the numbering discrepancy in Section 5(b) between the 1992 ISDA and 2002 ISDA. This is caused by a new 5(b)(ii) (Force Majeure Event) in the 2002 ISDA before Tax Event, which is thus shunted from Section 5(b)(ii) (in the 1992 ISDA) to Section 5(b)(iii) (in the 2002 ISDA).

First established in the 1987 ISDA, CEUM was gently upgraded for the 1992 ISDA to include Credit Support Providers and Specified Entities, and to clarify who, upon such a merger, is the Affected Party, as per this comparison.

It then had quite the overhaul of Credit Event Upon Merger between 1992 ISDA and 2002 ISDA as this comparison illustrates.

Designated Event is part of the definition of Credit Event Upon Merger in the 2002 ISDA, and doesn’t have an equivalent in the 1992 ISDA nor, obviously enough,the 1987 ISDA.

The 2002 ISDA introduced the “Designated Event” in an attempt to define more forensically the sorts of corporate events that should be covered by CEUM. They are notoriously difficult to pin down. Even before the 2002 ISDA was published, it was common to upgrade the 1992 ISDA formulation to something resembling the glorious concoction that became Section 5(b)(v) of the 2002 ISDA. The 1992 wording is a bit lame. On the other hand, you could count the number of times an ISDA Master Agreement is closed out purely on account of Credit Event Upon Merger on the fingers of one hand, even if you had lost all the fingers on that hand to an industrial accident.

So — yeah.

Summary

Known among the cognoscenti as “CEUM”, the same way Tax Event Upon Merger is a “TEUM”. No idea how you pronounce it, but since ISDA ninjas communicate only in long, appended, multicoloured emails and never actually speak to each other, it doesn’t matter.

Pay attention to the interplay between this section and Section 7(a) (Transfer). You should not need to amend Section 7(a) (for example to require equivalence of credit quality of any transferee entity etc., because that is managed by CEUM.

Note also the interrelationship between CEUM and a Ratings Downgrade Additional Termination Event, should there be one. One can be forgiven for feeling a little ambivalent about CEUM because it is either caught by Ratings Downgrade or, if there is no requirement for a general Ratings Downgrade, insisting on CEUM seems a bit arbitrary (i.e. why do you care about a downgrade as a result of a merger, but not any other ratings downgrade?)

General discussion

Template:M gen 2002 ISDA Credit Event Upon Merger

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No changes between the versions of this rather unnecessary definition. The men and women of ISDA’s crack drafting squad™ must have stood back and admired the handiwork of their 1992 forebears, high-fived each other and gone, “nice job, dudes and dudettes”.

General discussion

Template:M gen 2002 ISDA Credit Support Document

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A Credit Support Provider is basically a guarantor: a third party who stands being the obligations of a counterparty to the ISDA Master Agreement. Usually this is someone providing an all obligations guarantee or a standby letter of credit, but on rare occasions — very rare, usually involving espievies — might be a third party directly posting credit support to the other party under a Credit Support Document. In any case it is not a direct counterparty to the ISDA Master Agreement itself, whether or not the CSA counts as a Credit Support Document.

Given that a 1995 CSA is not a Credit Support Document at all, but a Transaction under the ISDA Master Agreement, a party to it is obviously not a Credit Support Provider.

A 1994 NY CSA, on the other hand, is a Credit Support Document though. So should a Party to the ISDA Master Agreement, where there is a 1994 NY CSA, be described as a “Credit Support Provider"?

No, sayeth the User’s Guide to the 1994 NY CSA:

“Parties to an ISDA Master Agreement should not, however, be identified as Credit Support Providers with respect to the Annex, as such term is intended only to apply to third parties.”

the Users’ Guide to the 2002 ISDA is similarly emphatically vague:

“The meaning of “Credit Support Provider” ... should apply to any person or entity (other than either party) providing, or a party to, a Credit Support Document delivered on behalf of a particular party.”

This means that a New York Law CSA — which is not a Transaction under the ISDA architecture, remember, is a Credit Support Document, but the person providing Credit Support under it — is not a “Credit Support Provider”?

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Template:M gen 2002 ISDA Credit Support Provider

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Template:M comp disc 2002 ISDA Cross-Default

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Template:M summ 2002 ISDA Cross-Default

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Template:M gen 2002 ISDA Cross-Default

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A “Defaulting Party” is one who has committed or suffered, and a “Non-defaulting Party” is one who is not implicated in the commission or sufferance of, an Event of Default. There is something judgmental and contemptuous about a defaulter, that there isn’t about one who is merely affected.

Summary

The key thing to notice here is that — in an uncharacteristically rather neat, understated bit of drafting — Defaulting Party encapsulates a party who has itself defaulted, or whose Credit Support Provider or Specified Entity has committed an act which amounts to an Event of Default for that counterparty to this ISDA Master Agreement. I know, I know, this doesn’t seem that big of a deal: this sort of thing that should be plain, obvious and go without saying — but it saves you a job when, in your peregrinations round the party’s Confirmation, you come to talk of pending Events of Default and Termination Events agaisnt that party.

Instead of saying, laboriously, i“f there is an Event of Default or Termination Event with respect to a party or its Credit Support Providers or Specified Entities, as the case may be” you can speak of a Defaulting Party or an Affected Party.

Of course, it would be nice if there was a catch all for a party who has committed an Event of Default or suffered a Termination Event, so you didn’t need to go “Defaulting Party or Affected Party, as the case may be” — cheekily we suggest “Innocent Party” and “Implicated Party” (“Guilty Party”, though fun, isn’t quite right, seeing as Termination Events aren’t meant to impute any kind of culpability).

General discussion

Template:M gen 2002 ISDA Defaulting Party

General discussion

All or substantially all is a modifier calculated to snooker that smart Alec who, for example, sells his entire business barring a single chair, to avoid breaching a covenant preventing him from disposing of “all of the business”. This is not the behaviour of a good egg and the better question to ask yourself is why you did business with him in the first place.

In any case, your qualifier leads only to a different kind of uncertainty: what counts as “substantial”? Discussions on the in-any-case tedious topic of Credit Event Upon Merger and Merger Without Assumption tend quickly to go this way. The countless learned articles and client briefing notes on the topic (let me Google that for you) will tell you that the benefit of this kind of drafting accrues mainly to those in the legal profession, but even then only through their very fear and loathing of the notion.

Comparisons

You want to spend your time looking at Close-out Amount, and, by way of comparison, the magnificent contrivance that was the 1992 ISDA’s equivalent, Loss or Market Quotation. There was no “Determining Party” concept in the 1992 ISDA.

Summary

Not to be confused with a Determining Party for the purposes of the Equity Derivatives definitions, of course. Right?

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Template:M gen 2002 ISDA Determining Party

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Template:M comp disc 2002 ISDA Early Termination Amount

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Template:M summ 2002 ISDA Early Termination Amount

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Template:M gen 2002 ISDA Early Termination Amount

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Template:M comp disc 2002 ISDA Early Termination Date

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Template:M summ 2002 ISDA Early Termination Date

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Template:M gen 2002 ISDA Early Termination Date

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No equivalent definition in the 1992 ISDA. There wasn’t really such a thing as email back then.

Summary

An innocuous definition you would think but you would be wrong. For behold: an electronic message excludes e-mail. This was a persuasive factor in the learned judge’s idiosyncratic reasoning in the great case of Greenclose v National Westminster Bank plc, a case that illustrates the point that little old ladies make bad law.

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Template:M gen 2002 ISDA electronic messages

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The expression “English law” is used, but not defined in the 1992 ISDA. It is defined in the 2002 ISDA, though curiously with a lower case “l” for “law”, and is useful as a toggle in the Governing Law clause, and to default to a Termination Currency if you have forgotten to provide one (for English law, the default Termination Currency is ... euro ... ouch ouch ouch can you imagine how UKIP must feel about that?), but not necessarily something that is going to move the world, even if the political and juridical subdivisions of what they used to call Albion are an utter Zodiac Mindwarp if you are careless enough to investigate them for a while. And no, Brexit means Brexit did not help.

Summary

Though there are some British Isles, seeing as they include the Republic of Ireland, there is no British law. Though there is a Great Britain — being the largest of the British Isles: the one with England, Scotland and Wales on it — there is no law of Great Britain. Though the political entity is the United Kingdom of Great Britain and Northern Ireland, there is no UK law. The Scots do their own thing. And let us not get into how the Anglo memeplex is represented in the world’s sporting tournaments.

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Template:M gen 2002 ISDA English law

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Template:M comp disc 2002 ISDA Event of Default

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Template:M summ 2002 ISDA Event of Default

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Template:M gen 2002 ISDA Event of Default

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Template:M comp disc 2002 ISDA Force Majeure Event

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Template:M summ 2002 ISDA Force Majeure Event

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Template:M gen 2002 ISDA Force Majeure Event

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Template:M comp disc 2002 ISDA General Business Day

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Template:M gen 2002 ISDA General Business Day

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Template:M comp disc 2002 ISDA Illegality

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Template:M gen 2002 ISDA Illegality

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The joyous expression first found voice in the 1987 ISDA and somewhat undercuts JC’spet theory that the absurd prolixity of modern commercial drafting is the fault of word processing. There wasn’t any word processing in 1986. It was all typewriters, carbon paper and Tipp-Ex.

Anyhow, you would like to think as the generations rolled on ISDA’s crack drafting squad™ could do something to improve a passage with a quintuple negative, wouldn’t you? Even, if, bloody-mindedly, to add a sixth negative, just to underline how scanty is the damn they give about the neurotic whinings of those, like JC, who are always simpering on about more economical expressions. In your face, prose stylists, such a stance might say. Actually, since I’m here, have a fricking seventh negative, punk, and brand it on your forehead so all who look upon you will know who it was who schooled you.

We can but dream, possums. We can only imagine what might have been. but no; they left the ghastly tract inviolate. In this place, at least the innocent spirit of 1987’s Children of the Forest — for this is their text.

Summary

Negatives, negatives, everywhere

Without wishing to be overly negative, this one truly comes from the "wow" file in indefensible drafting:

... other than a tax which would not be imposed but for...

Not only a triple negative, but since the squad’s definition of Tax already contains a negative (being any tax that isn’t a Stamp Tax) and “Indemnifiable Tax” is itself often used in the negative (e.g. “a tax which is not an Indemnifiable Tax”) — or even double negative (e.g. “other than a tax which is not an Indemnifiable Tax”) in the body of the ISDA Master Agreement. That makes it a sextuple negative. Beat that ISLA.

Now: as we know, HAL 9000 is coming to a legal workspace near you and will soon deliver us from these noisome legal curlicues. The JC fed this language into the “OpenAI” text generator, and asked for a summary that a second grader (in old money, an eight-year-old) could understand and, well, the outcome is impressive:

Indemnifiable Tax is a kind of tax that is different from other taxes. It is a tax that is only imposed when someone is connected to the country or state that imposes the tax. This connection could be because the person is from the country, does business there, or has gotten money from there.

Stamp Taxes are not Indemnifiable Taxes

Stamp Taxes are not Indemnifiable Taxes. They are covered by Section 4(e) and not the general gross-up in Section 2(d). They are not covered by Payee Tax Representations.

Comparisons

We are close to the turtles, here, ladies and gentlemen. The ISDA’s crack drafting squad™ definition of the “law” is as interesting for what it does not say as what it does, and all rounded out nicely by that sweetly ambivalent includes. Not means; just includes.

So — well, you know...

Summary

Now of all people you, would think a bunch of lawyers would know a law when they see one, but when it comes to the squad you can never be too careful. Nor should one arbitrarily restrict oneself to one’s field of competence — for who knows what sort of things could, under some conditions, from particular angles and in certain lights be for all intents and purposes laws even if, for other times and other peoples, they might not be? The answer is to set out the basic, sufficient conditions to count as a “law”, without ruling out other contrivances that one might also like to regard as laws, should the context recommend them. Here, using “includes” instead of “means” fits the bill admirably.

General discussion

Template:M gen 2002 ISDA law

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The keen will have noticed that “Local Business Day” under an English law CSA is defined quite separately from “Local Business Day” as it is defined under the ISDA Master Agreement itself, whereas a Local Business Day under a New York law CSA, while separately defining the term, only goes on to defer to the original definition of LBD in the ISDA Master Agreement, pausing only to clarify that references to “payment” in the ISDA Master Agreement definiton are deemed to include Transfers under the CSA.

Why ISDA’s British crack drafting squad™ couldn’t have done this too, we can only wonder.

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Template:M gen 2002 ISDA Local Business Day

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Template:M gen 2002 ISDA Local Delivery Day

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If the ISDA Master Agreement ever becomes self-aware and then takes over skynet, this will be the clause that did it.

Summary

You know - this Master Agreement. right here.

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Template:M gen 2002 ISDA Master Agreement

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Template:M comp disc 2002 ISDA Merger Without Assumption

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Template:M summ 2002 ISDA Merger Without Assumption

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Template:M gen 2002 ISDA Merger Without Assumption

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Template:M comp disc 2002 ISDA Multiple Transaction Payment Netting

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Template:M summ 2002 ISDA Multiple Transaction Payment Netting

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Template:M gen 2002 ISDA Multiple Transaction Payment Netting

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A clause so joyously well-crafted in 1992, that ISDA’s crack drafting squad™ saw no need to change it a decade later, when the opportunity presented itself. They might have grasped it to devise a concept less clumsy than “the Non-affected Party or the Non-defaulting Party, as the case may be” — you know, like “Innocent Party”, or something like that — but perhaps that’s just me.

Summary

Template:M summ 2002 ISDA Non-affected Party

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Template:M gen 2002 ISDA Non-affected Party

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Template:M comp disc 2002 ISDA Non-default Rate

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Template:M gen 2002 ISDA Non-default Rate

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Template:M comp disc 2002 ISDA Non-defaulting Party

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To be compared with - well, Defaulting Party. Of all things. And Non-affected Party, as well. The difference between a Non-defaulting Party and a Non-affected Party, and the linguistic torture that distinction as inflicted on the race of ISDA lawyers ever since, says everything you need to know about the absurdity of modern commercial law.

• Do say: “the Non-defaulting Party or the non-Affected Party, as the case may be” over and over again.
• Don’t say: “Is there really no other way you could get across this concept, for crying out loud?”
  

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Template:M gen 2002 ISDA Non-defaulting Party

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Template:M comp disc 2002 ISDA Office

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Template:M gen 2002 ISDA Office

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Template:M comp disc 2002 ISDA Other Amounts

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Template:M summ 2002 ISDA Other Amounts

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Template:M gen 2002 ISDA Other Amounts

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Template:M comp disc 2002 ISDA Payee

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Template:M summ 2002 ISDA Payee

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Template:M gen 2002 ISDA Payee

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Template:M comp disc 2002 ISDA Payer

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Template:M summ 2002 ISDA Payer

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Template:M gen 2002 ISDA Payer

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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.

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.

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.

• Failure to Pay or Deliver has both a short grace period and requires notice from the Non-defaulting Party before it becomes a full EOD;
• Breach of Agreement has an unusably, epochally long grace period — I mean thirty fricking days! — and requires notice from the Non-defaulting Party before it becomes a full EOD;
• Credit Support Default has no grace period or notice requirement, but there’s a good argument that any grace periods and notice requirements under the Credit Support Document in question would get pulled in by reference, so they are there in effect;
• Misrepresentation has neither a grace period or a notice requirement. The theory being a representation — any representation other than a tax one — being a statement inducing one to enter into the contract in the first place —is of such fundamental moment that its untruth justifies summary execution. Careful here, though, misrepresentations are a bit of a minefield to step through. See especially section 3(d).
• DUST references notice requirements and grace periods under the Specified Transaction (where there is has been a default) but not where it is a repudiation, but that kind of figures.
• Cross Default, that most absurd of all Events of Default, has no notice requirement, no grace period, and doesn't even require the lender of the Specified Indebtedness to have exercised a termination right — though any grace period under the Specified Indebtedness still applies.
• Bankruptcy has no notice requirement or grace period (indeed, on Automatic Termination Event applies it may happens even without the Non-defaulting Party’s knowledge), though there are some grace periods under the various tedious limbs of Bankruptcy definition, and these vary by edition of the ISDA Master Agreement;
• Merger Without Assumption has neither notice requirement or grace period — again not unreasonable, since a merger without assumption is tantamount to a repudiation of contract, and if you’re no longer playing the game, I don’t see why I should.
  

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Template:M comp disc 2002 ISDA Proceedings

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Template:M comp disc 2002 ISDA Process Agent

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Template:M summ 2002 ISDA Process Agent

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Template:M gen 2002 ISDA Process Agent

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Rate of exchange — for reasons known only to ISDA’s crack drafting squad™ not capitalised — features only in Section 6(f), sealing with set-off, and Section 8(b), dealing with Contractual Currency. Exchange rate: the rate at which you exchange things. Maybe they couldn’t bring themselves to capitalise it because it is so obvious.

Summary

You could scarcely ask for a less necessary definition. In their hearts, you sense ISDA’s crack drafting squad™ knew this, for they couldn’t find it in themselves to even capitalise it. In the 1992 ISDA, rate of exchange didn’t even make the Definitions section, but was half-heartedly tacked onto the end of a clause halfway through the Contractual Currency section. It made it into the 2002 ISDA’s Definitions Section only because it somehow wangled its unecessary way into the new Set-off clause (Section 6(f) of the 2002 ISDA).

But if two guiding principles of defining terms are (i) don’t, for terms you only use once or twice, and (ii) don’t, if the meaning of the thing you are considering defining is patently obvious — then “rate of exchange” comprehensively fails the main criteria of a good definition.

The JC’s general view is, all other things being equal, to ease comprehension, eschew definitions.

Also, could they not have used “exchange rate”, instead of rate of exchange?

General discussion

Template:M gen 2002 ISDA rate of exchange

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Relevant Jurisdiction carries the same non-meaning in the 2002 ISDA as it did in the 1992 ISDA. Which is nice.

Summary

Relevant Jurisdiction is a special artefact in the ISDA canon because, insofar as the ISDA Master Agreement proper is concerned, it is the only piece of text that falls definitively below the Biggs threshold. It isn’t used in the ISDA Master Agreement itself at all.

HOLD YOUR LETTERS, PEDANTS. Yes, it is true, it does feature in the printed form in the Part 2 Payer Representations. But these are, by their terms, voluntary, optional and malleable commercial terms, that the parties may strike out or adjust, leaving the Relevant Jurisdiction dangling there behind the ISDA’s woolly posterior, like a dag that may not be shorn. The irony! Relevant to what?! Nothing!

You might ask why this definition — which is tedious, sure, but hardly a backbreaker — couldn’t have been wrapped into the text of the actual representation in Part 2

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Template:M gen 2002 ISDA Relevant Jurisdiction

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Template:M comp disc 2002 ISDA Schedule

Summary

The Schedule is where the parties make their elections, customised representations, and any other amendments to the form of the ISDA that they want to apply across the board. Thus the Schedule is the heart of the ISDA negotiation. It is famously divided into five parts, of which you will spend most of your time in Parts 1 and 5.

Part 1 - Termination Provisions
Part 2 - Tax Representations (Schedule)
Part 3 - Agreement to Deliver Documents
Part 4 - Miscellaneous (Schedule)
Part 5 - Other Provisions

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Template:M gen 2002 ISDA Schedule

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Template:M comp disc 2002 ISDA Scheduled Settlement Date

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Template:M summ 2002 ISDA Scheduled Settlement Date

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Template:M gen 2002 ISDA Scheduled Settlement Date

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Template:M comp disc 2002 ISDA Set-off

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Template:M summ 2002 ISDA Set-off

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Template:M gen 2002 ISDA Set-off

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They got their over-engineering right in the first go round, and the “Specified Entity” concept is largely the same in the 2002 ISDA as it was in the 1992 ISDA. The Absence of Litigation clause got a makever on 2002 to include Specified Entities, too — in 1992 it only mentioned Affiliates. Good, huh?

Fun fact: in the 1992ma, it says “Specified Entity has the meanings” — plural — “specified in the Schedule.” By 2002, ISDA’s crack drafting squad™ had come back to its senses. JC mentions this only to demonstrate his own unfathomable attention to detail, and to point up a want of fastidiousness on the part of the fastidiousest cabal known to law.

Summary

A Specified Entity is any affiliate of a counterparty to an ISDA Master Agreement which is designated in the relevant Schedule.

It is relevant to the definition of Cross Default and Default under Specified Transaction in that it widens the effect of those provisions to include defaults by the parties specified.

It is so (~ cough ~) important that it is, literally, the first thing you see when you regard an ISDA Schedule.

The same concept in both versions of the ISDA Master Agreement only with different clause numberings. Specified Entity is relevant to:

• DUST
• Cross Default
• Bankruptcy
• Credit Event Upon Merger

And of course the Absence of Litigation representation. Let’s not forget that.

Each party designates its Specified Entities for each of these events in Part 1(a) of the Schedule, which gives the Schedule its familiar layout:

(a) “Specified Entity” means in relation to Party A for the purpose of:― Section 5(a)(v), [SPECIFY]. Section 5(a)(vi), [SPECIFY]. Section 5(a)(vii), [SPECIFY]. Section 5(b)(v), [SPECIFY]. and in relation to Party B for the purpose of:― Section 5(a)(v), [SPECIFY]. Section 5(a)(vi), [SPECIFY]. Section 5(a)(vii), [SPECIFY]. Section 5(b)(v), [SPECIFY].

Now, why would anyone want different Affiliates to trigger this a Event of Default depending precisely upon how they cork-screwed into the side of a hill? Well, there is one reason where it might make a big difference when it comes to Bankruptcy, and we will pick that up in the premium section. But generally — and even in that case, really — in our time of variation margin it really ought not to be the thing that is bringing down your ISDA Master Agreement.

Note it also pops up as relevant in the “Absence of Litigation” representation in Section 3(c) of the 2002 ISDA.

General discussion

Template:M gen 2002 ISDA Specified Entity

Comparisons

No change to this definition between the 1992 ISDA and the 2002 ISDA. This clause is only really relatable in the context of Cross Default Event of Default, of which it is a component.

Summary

See the Cross Default page which discusses Specified Indebtedness in detail — gory detail, if you are a premium subscriber — in the only context in which it appears: as the type of contract to which a Cross Default applies.

General discussion

Template:M gen 2002 ISDA Specified Indebtedness

Comparisons

A Specified Transaction under the 1992 ISDA is, by the standards of ISDA’s crack drafting squad™, monosyllabic to the point of being terse. But that is as nothing compared to the 1987 ISDA, which wasn’t even called a Specified Transaction, but was just a Specified Swap.

Under the 2002 ISDA, it is expressed with far more of the squad’s signature sense of derring-do and the Byzantine, expanding the basic definition:

• Specifically to include things we have thunk of since 1992, such as futures, credit derivatives, repo, stock lending, weather derivatives, NDFs, transactions executed under terms of business; and
• Generally to include similar transactions that are presently or in future become common in the financial markets — a neat a catch-all, designed to include any future pieces of financial wizardry (and/or mass destruction) that have not been thunk of just yet.
  

Summary

Used in the Default under Specified Transaction Event of Default under Section 5(a)(v) — fondly known to those in the know as “DUST”.

What?

Specified Transactions are those financial markets transactions between you and your counterparty other than those under the present ISDA Master Agreement, default under which justifies the wronged party closing out the present ISDA. “Specified Transactions” therefore specifically exclude Transactions under the ISDA itself for the sensible reason that a default under those is covered by by Failure to Pay or Deliver and Breach of Obligation. It might lead to a perverse result if misadventure under an ISDA Master Agreement Transaction which did not otherwise amount to an Event of Default, became one purely as a result of the DUST provision, however unlikely that may be.

Credit support annexes?

We are going to go out on a limb here and say that little parenthetical “(including an agreement with respect to any such transaction)” is, if not deliberately designed that way, is at least calculated to capture failures under a credit support annex which, yes, is a Transaction under an ISDA Master Agreement but no, is not really a swap or anything really like one.

There is enough chat about Credit Support Providers (yes, yes, the counterparty itself is of course not a Credit Support Provider) to make us think, on a fair, large and liberal interpretation, that a default under the CSA to a swap Transaction is meant to be covered.

General discussion

Template:M gen 2002 ISDA Specified Transaction

Comparisons

Template:M comp disc 2002 ISDA Stamp Tax

Summary

Template:M summ 2002 ISDA Stamp Tax

General discussion

Template:M gen 2002 ISDA Stamp Tax

Comparisons

Template:M comp disc 2002 ISDA Stamp Tax Jurisdiction

Summary

Template:M summ 2002 ISDA Stamp Tax Jurisdiction

General discussion

Template:M gen 2002 ISDA Stamp Tax Jurisdiction

Comparisons

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

You will find the redlines above most disappointing — or delightful, depending on whether you like order or chaos — as this language has not changed at all since 1987. “{{Template:2002prov|Tax}}” features in the ISDA Master Agreement as follows:

• Section {{Template:2002prov|4(a)}}: To furnish specified information, including as regards (at {{Template:2002prov|4(a)(iii)}}) any forms required to pay {{Template:2002prov|Tax}} without withholding, leading on to...
• Section {{Template:2002prov|2(d)}}: All payments are made without withholding or deduction unless required by law, and (where withholding IS required by law and the {{Template:2002prov|Tax}} is an {{Template:2002prov|Indemnifiable Tax}}) a gross-up is required.
• Section {{Template:2002prov|4(e)}}: Each party pays its own {{Template:2002prov|Stamp Tax}} on execution of the {{Template:2002prov|Agreement}} (and indemnifies the other party if its taxing jurisdiction imposes about a stampable amount on the other party)

Summary

{{{{{1}}}|Tax}} and {{{{{1}}} |Stamp Tax}} are meant to be mutually exclusive and both refer to duties levied on payments under the swap {{{{{1}}} |Transaction}} itself and not under hedges to it, so be careful when using them (especially in the context of delta-one synthetic equity swaps where the main stamp duty and capital gains issues accrue on Hedge Positions. For those you might want to introduce a conceopt like Local Taxes, or something similar.

Here’s what the ISDA Users’ guide has to say about {{{{{1}}} |Tax}} and {{{{{1}}} |Stamp Tax}}, in a footnote on page 58.

“{{{{{1}}} |Tax}}” is defined in Section {{{{{1}}} |14}} as any tax, charge or other similar listed items, except a stamp, registration, documentation or similar tax (i.e., a “{{{{{1}}} |Stamp Tax}}” as defined in Section {{{{{1}}} |14}} of the 2002 Agreement).

General discussion

Template:M gen 2002 ISDA Tax

Comparisons

Numbering Discrepancy: Note the numbering discrepancy in Section 5(b) between the 1992 ISDA and 2002 ISDA. This is caused by a new 5(b)(ii) (Force Majeure Event) in the 2002 ISDA before Tax Event, which is thus shunted from Section 5(b)(ii) (in the 1992 ISDA) to Section 5(b)(iii) (in the 2002 ISDA).

The 1992 ISDA represented a significant change from the 1987 ISDA which was a bit half-hearted about gross-ups.

Other than the renumbering, no real changes in the definition of Tax Event from the 1992 ISDA to the 2002 ISDA though, unhelpfully, the sub-paragraph references in the 1992 ISDA are (1) and (2) and in the 2002 ISDA are (A) and (B). Otherwise, pretty much the same.

Summary

Basically, the gist is this: if the rules change after the Trade Date such that you have to gross up an Indemnifiable Tax would weren’t expecting to when you priced the trade, you have a right to get out of the trade, rather than having to ship the gross up for the remainder of the Transaction.

That said, this paragraph is a bastard to understand. Have a gander at the JC’s nutshell version (premium only, sorry) and you’ll see it is not such a bastard after all, then.

In the context of cleared swaps, you typically add a third limb, which is along the lines of:

(3) required to make a deduction from a payment under an Associated LCH Transaction where no corresponding gross up amount is required under the corresponding Transaction Payment under this Agreement.

General discussion

Template:M gen 2002 ISDA Tax Event

Comparisons

Numbering Discrepancy: Note the numbering discrepancy in Section 5(b) between the 1992 ISDA and 2002 ISDA. This is caused by a new 5(b)(ii) (Force Majeure Event) in the 2002 ISDA before Tax Event, which is thus shunted from Section 5(b)(ii) (in the 1992 ISDA) to Section 5(b)(iii) (in the 2002 ISDA).

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

Tax Event Upon Merger: Note the missing “indemnifiable” from the fifth line of the 2002 ISDA version and the expanded description of “merger events” towards the end of the clause. And the renumbering as a result of the Force Majeure Event clause in the 2002 ISDA.

Summary

This is you can imagine, a red letter day for ISDA’s crack drafting squad™ who quite outdid itself in the complicated permutations for how to terminate an ISDA Master Agreement should there be a Tax Event or a Tax Event Upon Merger. Things kick off in Section 6(b)(ii) and it really just gets better from there.

So, Tax Event Upon Merger considers the scenario where the coming together of two entites — we assume they hail from different jurisdictions or at least have different practical tax residences — has an unfortunate effect on the tax status of payments due by the merged entity under an existing Transaction.

It introduces a new and unique concept — the “Burdened Party”, being the one who gets slugged with the tax — and who may or may not be the “Affected Party” — in this case the one subject to the merger.

General discussion

Template:M gen 2002 ISDA Tax Event Upon Merger

Proposed ISDA amendments as a result of adjustment to Section 2(a)(iii)

The 2(a)(iii) amendment juggernaut seems to have lost its heat but there was a time when ISDA was proposing the following:

"Terminated Transactions” means, with respect to any Early Termination Date, (a) if resulting from an Illegality or a Force Majeure Event, all Affected Transactions specified in the notice given pursuant to Section 6(b)(iv), (b) if resulting from any other Termination Event, all Affected Transactions and (c) if resulting from an Event of Default, all Transactions, in each case under which a party has or may have any obligation, including, without limitation, an obligation to pay an amount that became payable (or would have become payable but for Section 2(a)(iii) or due but for Section 5(d)) to the other party under Section 2(a)(i) or 2(d)(i)(4) on or prior to that Early Termination Date and which remains unpaid as at such Early Termination Date.

General discussion

Template:M gen 2002 ISDA Termination Currency

Comparisons

But for the edition-appropriate references to “Loss and Market Quotation (as the case may be)” for the 1992 ISDA, and Close-out Amount (for the 2002 ISDA, these definitions are identical.

Summary

A fabulous example of the English language getting the better of a committee of its own seasoned professional users, ISDA’s remarkable “Termination Currency Equivalent” definition erodes the fabric in which the basic assumptions of people who share a common language are woven.

It convolutes, to the point of incomprehensibility, an idea well enough described by its own name. Who would labour under a serious doubt about this expression:

“one party must pay the other the amount in its termination currency equivalent”?

Failing that, how about this:

“one party must pay the other an equivalent amount in the termination currency”?

The idea of an amount in one currency of an amount expressed in another really oughtn’t to be that hard to master, but to see how hard someone with profound ontological uncertainty can make it, have a gander at this ==>

General discussion

Here’s what the Encyclopaedia Galactica has to say about Termination Currency Equivalent:

Under the 2002 ISDA, a payment on early termination will be made in the Termination Currency. The “Termination Currency” must be specified in Part 1(f) of the Schedule to the 2002 ISDA and, if not specified or the currency specified is not freely available, the fallback will be U.S. dollar for a 2002 Agreement governed by New York law, and the euro if a 2002 ISDA is governed by English law. The 1992 Agreement had a U.S. dollar fallback regardless of the governing law of the 1992 ISDA. In calculating amounts payable, any Close-out Amount or Unpaid Amount is converted to a “Termination Currency Equivalent” on the basis of an exchange rate determined in accordance with the 2002 ISDA by a foreign exchange agent.

Comparisons

Just one of the four different defined terms relating to interest rate determinations in the ISDA Master Agreement. The weren’t going to leave anything to chance, those ninjas.

Summary

Ballast, in a word: Termination Rate is an expression which features but once in the ISDA Master Agreement — it is the fallback interest rate to apply to Early Termination Amounts, when all other methods haven’t worked, to accrue interest between determination and payment — and which, as you’ll see, amounts to the party’s own cross-my-heart-and-hope-to-die-but-I’m-still-not-going-to-justify-it cost of borrowing in the market.

Which scarcely would deserve a definition even if it was used repeatedly through the whole agreement.

In any case, since on your own theory of the game, your counterparty is almost certainly a dead parrot at this point, spending too much time agonising about how much interest you can claim from it on a Close-out Amount you are not going to get paid in any case is hardly one of the better uses of its — or your, for that matter — remaining time on this mortal coil.

General discussion

Template:M gen 2002 ISDA Termination Rate

Comparisons

Not to be confused with Threshold in the 1995 CSA and all its varieties — being the amount of gross Exposure beyond which one must start posting variation margin — the Threshold Amount is a level relevant to the calculation of the Cross Default Event of Default - it is the aggregate principle amount of Specified Indebtedness one must have defaulted on to permit one’s counterparty to close you out.

Summary

Threshold Amount

The Threshold Amount is a key feature of the Cross Default Event of Default in the ISDA Master Agreement. It is the level over which accumulated indebtedness defaults comprise an Event of Default. It is usually defined as a cash amount or a percentage of shareholder funds, or both, in which case — schoolboy error hazard alert — be careful to say whether it is the greater or lesser of the two.

Because of the snowball effect that a cross default clause can have on a party’s insolvency it should be big: like, life-threateningly big — because the consequences of triggering a Cross Default are dire, and it may create its own chain reaction beyond the ISDA itself. So expect to see, against a swap dealer, 2-3% of shareholder funds, or sums in the order of hundreds of millions of dollars. For end users the number may well be a lot lower (especially for thinly capitalised investment vehicles like funds — like, ten million dollars or so — and, of course, will key off NAV, not shareholder funds.

General discussion

Template:M gen 2002 ISDA Threshold Amount

Comparisons

Template:M comp disc 2002 ISDA Transaction

General discussion

Template:M gen 2002 ISDA Transaction

Summary

If you think of an ISDA Transaction as comprising offsetting payment streams, these payments fall into one of three ontological categories:

• Been and gone: Those that are already paid: settled, gone, checked into the hereafter; on permanent location in that foreign country we call the past — we care less about these; they are but a fossil record: they pose no risk, attract no capital and excite no prospects of revenue or compensation.
• Yet to come: Due to be paid, or delivered, at a specified date in the future. Perhaps fixed; perhaps yet to be determined, but conceptually still out there. It is, conventionally, by off setting the provisional present value of these future cashflows, that we value “the Transaction” — this is what we call its “replacement cost”.
• The twilight zone: That weird inter-regnum of payments whose due date has passed, and which should have have been paid, and thus emigrated permanently to that foreign country but, for whatever reason — inattention, inability, defiance, or the affordances of Section 2(a)(iii) — they have not yet been made, so they need to be worried about, accounted for and factored into things, over and above the “replacement” value of the trade.
  

General discussion

Template:M gen 2002 ISDA Unpaid Amounts

General discussion

Template:M gen 2002 ISDA Waiting Period