In gory detail
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1992 ISDA
2(a) General Conditions.
- 2(a)(i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.
- 2(a)(ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement.
- 2(a)(iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement.
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2002 ISDA
2(a) General Conditions
- 2(a)(i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.
- 2(a)(ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement.
- 2(a)(iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other condition specified in this Agreement to be a condition precedent for the purpose of this Section 2(a)(iii).
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See also a wider discussion of proposed changes at Section 2(a)(iii)
The provisions are the same in both versions of the ISDA Master Agreement
Section 2(a)(iii)
Section 2(a)(iii) of the ISDA Master Agreement was considered in the Metavante litigation, which has led to more or less the opposite conclusion to the court in Enron v TXU.
The following is a proposal to "fix" the issues perceived to arise from the Metavante and, more specifically, the Marine Trade case with respect to section 2(a)(iii), about which HMT Treasury is sufficiently concerned so as to establish a consultation group to advise it on the ISDA Master Agreement. Chris Allen is part of that group.
Mean time, ISDA is looking to propose a market led solution. That is HMT's preferred position but they may well legislate if a workable solution is not forthcoming.
HMT has not concluded that 2(a)(iii) necessarily operates as a walk-away clause (or "ipso facto" clause as it is called in the US) but is concerned it may have that economic effect and is is raising policy arguments as to why that should not be allowed to continue.
Clearly, any push towards a finding of "walk-aways" takes derivative counterparties to an unsupportable place with regard to RWA generation under the Capital Accords.
See Also
HMT concerns
The key concern for HMT relates to non-payment into the insolvent estate by the insolvent company's debtors. Specifically:
1. Time delay - how long can parties rely on 2(a)(iii) for? Indefinitely?
2. Opportunism: Can a non-defaulting party effectively monetise the gross obligations of a defaulting party by not designating an Early Termination Date and then realising value through the exercise of Set-off rights or the enforcement of security?
3. Faux J indicated in his judgment that the obligations of the non-defaulting party under the ISDA never come into existence if the condition precedent is not satisfied on the relevant payment date: i.e., the failure cannot be cured and the obligations cannot come into existence on a future date if the CP is subsequently satisfied. That view is controversial and was expressed obiter dicta. The CA may not address it for that latter reason.
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