Section 2(a)(iii)

ISDA Anatomy™

2002 ISDA

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).

(view template)

1992 ISDA

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.

(view template)

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See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.

The Varieties of ISDA Experience
Subject	2002 (wikitext)	1992 (wikitext)	1987 (wikitext)
Preamble	Pre	Pre	Pre
Interpretation	1	1	1
Obligns/Payment	2	2	2
Representations	3	3	3
Agreements	4	4	4
EODs & Term Events	5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • FM • Tax Event • TEUM • CEUM • ATE	5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM • ATE	5 Events of Default: FTPD • Breach • CSD • Misrep • DUSS • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM
Early Termination	6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations; Payment Date • Payments on ET • Set-off	6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET • Set-off	6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET
Transfer	7	7	7
Contractual Currency	8	8	8
Miscellaneous	9	9	9
Offices; Multibranch Parties	10	10	10
Expenses	11	11	11
Notices	12	12	12
Governing Law	13	13	13
Definitions	14	14	14
Schedule	Schedule	Schedule	Schedule
Termination Provisions	Part 1	Part 1	Part 1
Tax Representations	Part 2	Part 2	Part 2
Documents for Delivery	Part 3	Part 3	Part 3
Miscellaneous	Part 4	Part 4	Part 4
Other Provisions	Part 5	Part 5	Part 5

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Commentary

In a Nutshell™, section 2(a)(iii) does the following:

2(a)(iii) in a Nutshell™ _{(ISDA edition)}

Template:Nutshell ISDA 2(a)(iii)

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I’m sorry I asked

Draft ISDA Section 2(a)(iii) Protocol

These amendments are being led by ISDA and are likely to take effect by protocol. These changes are separate to the ones being contemplated under DFA.

Intent of drafting

The revised text looks to address 4 concerns (each arising from English case law):

Time Limit: Will now be triggered by the Defaulting Partyserving notice on the Non-defaulting Party. Bank of England, FSA and Fed all keen for the period to be short (UK had suggested 1 month).
Gross/Net issue: (per Lomas v Firth Rixson and Marine Trade v Pioneer)
Due Date Expiry issue: (per Marine Trade)
Extinguishment issue: (Firth Rixson) and the "Terminated Transaction" issue (per Cosco).

Outstanding Issues

The revised language raises a few concerns.

Incurable Events of Default: ISDA was looking to apply the time restriction only in respect of "incurable" Events of Default". Not actually sure the list was sufficiently comprehensive to achieve that. Others have suggested to limit to Bankruptcy. Anyway, does not matter because none of that works under English law for capital reasons and so ISDA will be changing to apply the language to all Events of Default (FSA will require this).
The language is problematic where, for example, a Defaulting Party informs the Non-defaulting Party of a Misrepresentation. Non-defaulting Party waives the misrep and then the "defaulter" experiences a Default Under Specified Transaction. Would leave a gap on the CP.

Original Text of Section 2(a)(iii)

The original language is in the panel above right. Innocuous looking, isn't it. But then the Protocol of the Elders of ISDA had a go at fixing Metavante concerns. Now look what they've done:

Modified Text as per ISDA draft protocol

NB there isn't a Section 2(e) in 2002 ISDA Master - this amendment is purely to bring the 1992 ISDA in line with the 2002 provision on Interest and Compensation.

Additional Definitions in Section 14

In gory detail

1992 ISDA Template:ISDA Master Agreement 1992 Terminated Transactions Definition Protocol (view template)	2002 ISDA "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. (view template)

2002 ISDA
Template:ISDA Master Agreement 2002 Condition End Date Definition Protocol
(view template)

Section 2(a)(iii) - ISDA Provision