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2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
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Section 6(e) in a Nutshell™
Use at your own risk, campers!
6(e) Payments on Early Termination. If an Early Termination Date occurs, the “ Early Termination Amount” will be determined as follows (subject to Section 6(f)).
- 6(e)(i) Events of Default. On an Early Termination Date following an Event of Default, the Non-defaulting Party will determine Early Termination Amount in the Termination Currency as the sum of:
- (a) the Close-out Amounts for each Terminated Transaction plus
- (b) Unpaid Amounts due to the Non-defaulting Party; minus
- (c) Unpaid Amounts due to the Defaulting Party.
- If the Early Termination Amount is positive, the Defaulting Party will pay it to the Non-defaulting Party. If negative, the Non-defaulting Party will pay its absolute value to the Defaulting Party.
- 6(e)(ii) Termination Events. If the Early Termination Date results from a Termination Event:―
- (1) One Affected Party. If there is one Affected Party, the Early Termination Amount will be determined as if they were Events of Default under Section 6(e)(i) (but subject to the Mid-Market Events rider below).
- (2) Two Affected Parties. If there are two Affected Parties, each party will determine the Termination Currency Equivalent of the Close-out Amounts for all Terminated Transaction and the Early Termination Amount will be:
- (A) the sum of
- (I) half of the difference between the higher amount (determined by party “X”) and the lower amount (determined by party “Y”) and
- (II) the Termination Currency Equivalent of the Unpaid Amounts owing to X minus
- (B) the Termination Currency Equivalent of the Unpaid Amounts owing to Y.
- If the Early Termination Amount is a positive number, Y will pay it to X; if negative , X will pay its absolute value to Y.
- (3) Mid-Market Events. In either case where the Termination Event is an Illegality or a Force Majeure Event, when determining a Close-out Amount the Determining Party will use mid-market valuations that do not take the Determining Party’s own creditworthiness into account.
- 6(e)(iii) Adjustment for Bankruptcy. If an “Automatic Early Termination” happens, one can adjust the Early Termination Amount to reflect payments or deliveries actually made between the automatic Early Termination Date and the payment date determined under Section 6(d)(ii).
- 6(e)(iv) Adjustment for Illegality or Force Majeure Event. The failure by a party or its Credit Support Provider to pay an Early Termination Amount when due will not be a Failure to Pay or Deliver or a Credit Support Default if caused by an Illegality or a Force Majeure Event. The unpaid amount will:
- (1) be treated as an Unpaid Amount for a subsequent Early Termination Date resulting from an Event of Default, a Credit Event Upon Merger or an Additional Termination Event affecting all outstanding Transactions; and
- (2) otherwise accrue interest in accordance with Section 9(h)(ii)(2).
- 6(e)(v) Pre-Estimate. The parties acknowledge that:
- (a) Each Early Termination Amount is a reasonable pre-estimate of loss and not a penalty; and
- (b) neither party may recover any additional damages as a consequence of terminating Terminated Transactions.
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Full text of Section 6(e)
6(e) Payments on Early Termination. If an Early Termination Date occurs, the amount, if any, payable in respect of that Early Termination Date (the “ Early Termination Amount”) will be determined pursuant to this Section 6(e) and will be subject to Section 6(f).
- 6(e)(i) Events of Default. If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the Non-defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early Termination Amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount to the Defaulting Party.
- 6(e)(ii) Termination Events. If the Early Termination Date results from a Termination Event:―
- (1) One Affected Party. Subject to clause (3) below, if there is one Affected Party, the Early Termination Amount will be determined in accordance with Section 6(e)(i), except that references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and to the Non-affected Party, respectively.
- (2) Two Affected Parties. Subject to clause (3) below, if there are two Affected Parties, each party will determine an amount equal to the Termination Currency Equivalent of the sum of the Close-out Amount or Close-out Amounts (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions, as the case may be, and the Early Termination Amount will be an amount equal to (A) the sum of (I) one-half of the difference between the higher amount so determined (by party “X”) and the lower amount so determined (by party “Y”) and (II) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to Y. If the Early Termination Amount is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of the Early Termination Amount to Y.
- (3) Mid-Market Events. If that Termination Event is an Illegality or a Force Majeure Event, then the Early Termination Amount will be determined in accordance with clause (1) or (2) above, as appropriate, except that, for the purpose of determining a Close-out Amount or Close-out Amounts, the Determining Party will:―
- (A) if obtaining quotations from one or more third parties (or from any of the Determining Party’s Affiliates), ask each third party or Affiliate (I) not to take account of the current creditworthiness of the Determining Party or any existing Credit Support Document and (II) to provide mid-market quotations; and
- (B) in any other case, use mid-market values without regard to the creditworthiness of the Determining Party.
- 6(e)(iii) Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because Automatic Early Termination applies in respect of a party, the Early Termination Amount will be subject to such adjustments as are appropriate and permitted by applicable law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii).
- 6(e)(iv) Adjustment for Illegality or Force Majeure Event. The failure by a party or any Credit Support Provider of such party to pay, when due, any Early Termination Amount will not constitute an Event of Default under Section 5(a)(i) or 5(a)(iii)(1) if such failure is due to the occurrence of an event or circumstance which would, if it occurred with respect to payment, delivery or compliance related to a Transaction, constitute or give rise to an Illegality or a Force Majeure Event. Such amount will (1) accrue interest and otherwise be treated as an Unpaid Amount owing to the other party if subsequently an Early Termination Date results from an Event of Default, a Credit Event Upon Merger or an Additional Termination Event in respect of which all outstanding Transactions are Affected Transactions and (2) otherwise accrue interest in accordance with Section 9(h)(ii)(2).
- 6(e)(v) Pre-Estimate. The parties agree that an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks, and, except as otherwise provided in this Agreement, neither party will be entitled to recover any additional damages as a consequence of the termination of the Terminated Transactions.
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Related agreements and comparisons
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Content and comparisons
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Discussion
The 1987 ISDA was half-cocked and shambolic, and laboured under the wishful illusion that if the other guy blew up, even if he was in the money, it was kind of okay to just flip him the bird and walk off with a windfall (in the form of not owing him the money you like, actually owed him). Not cool these days. Once folks realised this wouldn’t fly from a netting perspective they tried to fix it in the 1992 ISDA, whose close-out methodology is truly hideous.
ISDA’s crack drafting squad™ overhauled whole close-out process, soup to nuts, in the 2002 ISDA, and is now much more straightforward — as far as you could ever say that about ISDA’s crack drafting squad™’s output. But a large part of the fanbase — that part west of Cabo da Roca — sticks with the 1992 ISDA. Odd.
Differences, in very brief:
The 1992 ISDA has the infamous Market Quotation and Loss measures of value, and the perennially-ignored First Method and the more sensible Second Method means of evaluating the termination value of terminated Transactions. The 2002 ISDA has just the Close-out Amount to cover everything. So while the 1992 ISDA is far more elaborate and over-engineered, this is not to deny that the 2002 ISDA is elaborate or over-engineeered.
The 2002 ISDA has a new Section 6(e)(iv) dealing with Adjustment for Illegality or Force Majeure Event. This wasn’t needed in the 1992 ISDA, which didn’t have Force Majeure Event at all, and a less sophisticated Illegality.
Summary
For our step-by-step guide to closing out an ISDA Master Agreement see Section 6(a).
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
See also
References
Early Termination Amount is not actually defined in the 1992 ISDA, but is referred to obliquely in Section 6(e) as:
- ...The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section ...
Correctly, it is best referred to as a "Section 6(e) Amount" under the 1992 ISDA, although of course everyone does call it the Early Termination Amount. This inevitability was recognised in the 2002 ISDA, where it is defined in Section 6(e) as follows:
- ... the amount, if any, payable in respect of that Early Termination Date.
But the 2002 ISDA also has a close-out Amount, so you may want to know what is the difference between the Early Termination Amount and the Close-out Amount. Yes? Go on, then!