Specified Transaction - ISDA Provision

In gory detail

1992 ISDA Template:ISDA Master Agreement 1992 Specified Transaction Definition (view template)

2002 ISDA "Specified Transaction” means, subject to the Schedule, (a) any transaction (including an agreement with respect to any such transaction) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is not a Transaction under this Agreement but (i) which is a rate swap transaction, swap option, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option, credit protection transaction, credit swap, credit default swap, credit default option, total return swap, credit spread transaction, repurchase transaction, reverse repurchase transaction, buy/sell-back transaction, securities lending transaction, weather index transaction or forward purchase or sale of a security, commodity or other financial instrument or interest (including any option with respect to any of these transactions) or (ii) which is a type of transaction that is similar to any transaction referred to in clause (i) above that is currently, or in the future becomes, recurrently entered into in the financial markets (including terms and conditions incorporated by reference in such agreement) and which is a forward, swap, future, option or other derivative on one or more rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, economic indices or measures of economic risk or value, or other benchmarks against which payments or deliveries are to be made, (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. NB - paragraph breaks do not appear in the printed form. (view template)

Commentary

Note the 1992 version excludes actual Transactions under the ISDA itself. This is for the sensible reason that a default under an ISDA Transaction is covered by elsewhere in the ISDA (eg Failure to Pay or Deliver and Breach of Obligation concepts, and it might lead to a perverse result if a Transaction was not otherwise an Event of default under any ISDA provision but the DUST provision, however unlikely that may be.

The 2002 ISDA expands the basic definition of Specified Transaction to specifically include futures credit derivatives, repo, stock lending, weather derivatives, NDFs, transactions executed under terms of business and other commodities or similar transactions that is presently or in future becomes common in the financial markets.

Note DUST doesn't generally pick up contracts in the nature of borrowed money or indebtedness, because these are picked up under the wider scope of the Cross Default provision which, of course, applies to indebtedness owed to anyone, not just by your counterparty to you. Still, there is weirdness: Cross Default contemplates a Threshold Amount before it can be triggered. DUST doesn't. So this leads to an odd gap:

A (sub Threshold Amount) default under Specified Indebtedness between the two contractual parties would not entitle the innocent party to close out, but a default under any other derivative transaction between them (i.e., as dfefined in Specified Transaction) would - even if the value of the payment default was smaller than the default on borrowed money. Kind of counterintuitive. If you were to define DUST to include indebtedness, you'd be covered.

• Default under Specified Transaction