Illegality - ISDA Provision
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ISDA Anatomy™
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Illegality in a Nutshell™ (2002 ISDA edition)
“Illegality” is defined in Section 5(b).
See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.
1992 User Guide
Section 5(b)(i) provides that a Termination Event will occur if it becomes unlawful for a party to make a payment or delivery or receive a payment or delivery or comply with any material provision of a 1992 Agreement or it becomes unlawful for a party or a Credit Support Provider to perform under a Credit Support Document. The party in respect of which the Illegality has occurred will be the Affected Party. This Termination Event excludes any event which results from a breach by a party of the agreement in Section 4(b) to maintain authorizations necessary in connection with a 1992 Agreement or any Credit Support Document. Any such breach thus will be treated as an Event of Default and not an Illegality.
This Termination Event has been modified from the 1987 Agreement to make reference to transactions that settle by physical delivery and to replace the reference to “Specified Entity” in the corresponding provision of the 1987 Agreement with “Credit Support Provider” because clause (2) of Illegality relates to Credit Support Documents.
Section 5(c) of the 1992 Agreements addresses the case where an Event of Default occurs that also constitutes an Illegality by providing that such a case will be treated as an Illegality.
2002 User Guide
Illegality. Section 5(b)(i) provides that a Termination Event will occur if (after a Transaction is entered into and other than due to any action taken by a party or, if applicable, its Credit Support Provider or a breach by the party of its obligations under Section 4(b)) it becomes unlawful under any applicable law (i) for the Office through which a party makes and receives payments or deliveries with respect to such Transaction to make or receive a payment or 4 The two Tax-related Termination Events are addressed in Section IV below.
16 delivery under such Transaction or to comply with any material provision of the 2002 ISDA with respect to such Transaction; or (ii) for a party or its Credit Support Provider to perform under a Credit Support Document (whether to make or receive a payment or delivery or to comply with any other material provision of such Credit Support Document). Illegality, like Force Majeure Event (see Section II.F.3.b.below) but unlike other Termination Events, is anticipatory in that it may be triggered if it would be unlawful to make a payment or delivery or to comply on a day if the relevant payment, delivery or compliance were required on that day, even if no such payment, delivery or compliance is in fact required on that day. The party in respect of which the Illegality has occurred will be the Affected Party (although both parties could be Affected Parties depending on the circumstances).
Where performance under a Transaction is concerned, note that, by focusing on the ability of a party’s Office through which it makes and receives payments or deliveries with respect to such Transaction to perform, an Illegality could still occur despite the fact that the party may be able to satisfy its obligations by making or receiving a payment or delivery through another of its Offices. In the 1992 ISDA, Illegality focused simply on the ability of “a party” to perform.
It is important to note that an Illegality, like a Force Majeure Event, may only be triggered after giving effect to any applicable provision, disruption fallback or remedy specified in a Confirmation or elsewhere in the 2002 ISDA. For example, if the parties have incorporated the 2021 ISDA Interest Rate Derivatives Definitions or the 2021 ISDA Interest Rate Derivatives Definitions in the relevant Confirmation, any applicable disruption events and related fallbacks in these definitional booklets will be given effect and there may be no role for the Illegality (or Force Majeure Event) Termination Event. If, however, the applicable fallbacks, if any, do not resolve the problem, Illegality (or Force Majeure Event) may come into play. In view of the anticipatory nature of Illegality (and Force Majeure Event), these types of fallbacks may not, under the terms of the Confirmation for the Transaction, in fact apply at the time a party believes an Illegality (or a Force Majeure Event) has occurred.
The obligation of the Affected Party under the 1992 ISDA to use all reasonable efforts to transfer Affected Transactions in order to avoid the occurrence of the Termination Event is not included in the 2002 ISDA. Deferral of payments and deliveries after an Illegality occurs is discussed in Section II.F.3.b.1. below.
Illegality vs. Force Majeure
Note that under the 2002, Illegality trumps Force Majeure. Given that Illegality is no longer subject to the "two Affected Parties" delay on termination (as it was in the 1992 ISDA, this is significant.