Early Termination - ISDA Provision
How the Close-out mechanism Works
An Event of Default gives the Non-defaulting Party a right (but not an obligation) to designate an Early Termination Date with respect to all outstanding Transactions on not more than 20 days' notice.
- Note that Automatic Early Termination removes that optionality in the event of a counterparty's insolvency and is therefore sub-optimal from the Non-defaulting Party's perspective, and thus should only be employed where the consequences of not having it would be worse (e.g. in jurisdictons where close-out netting may be challenged in an insolvency but not before). (That is to say, this is one provision you should not insist on just because the other party insists upon it against you).
- For what this optionality not to terminate means, and how controversial it can be, see the commentary to Section 2(a)(iii).
Once all Transactions are terminated, you move to Section 6(e) which directs how to value the transactions (it depends on who is the Defaulting Party, and whether you have alected Loss or Market Quotation, and First Method or Second Method. Under the 2002 ISDA it is much easier.
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ISDA Anatomy™
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