Template:M gen 1992 ISDA 5(a)(v)

Acceleration, not Default

DUST is triggered by an acceleration following an event of default under the Specified Transaction, not upon the default itself. Since the Specified Transaction is between you and the other party to the ISDA Master Agreement, there is no great loss — it is within your gift to accelerate the other contract — and to achieve set-off you would have to do so anyway.

This is less drastic than the corresponding Cross Default provision, which imports all the Events of Default from all Specified Indebtedness into the present one, even if the counterparty to the defaulted contract has itself waived its rights to exercise.

Default under any Specified Transaction, and the question of overreach

DUST attaches to a “default” (not defined) under any Specified Transaction, not all Specified Transactions. But if you have a credit concern with a counterparty under a derivative-like master agreement — even on a failure to pay — you are hardly likely to be closing out some, but not other transactions. Especially not now in these days of compulsory regulatory variation margin. You’ll be closing out the lot. Yet, with different rules depending on whether its a failure to pay (before or at maturity), failure to deliver or repudiation, we think ISDA’s crack drafting squad™ has made it all a bit fiddly. They may be strictly correct, but come on.

Note that in the 2002 ISDA there is specific accommodation for the “mini close-out” concept you see nowadays in securities financing arrangements, which is a self-help remedy to deal with non-credit related settlement failures. That wasn't around in 1992, so wasn’t addressed in this version. ISDA’s crack drafting squad™ are good, but they’re not clairvoyant.

So you will see countertpasrties, especially in the US, where the 1992 ISDA is still popular, wordsmithing the ambit of the DUST provision. We have some sympathy with the point, pedantic though it may be, but really feel that the DUST formulation could be simplified for transactions under any master agreement — even for repudiation — by requiring the Non-Defaulting Party to have closed out the whole arrangement, not just the Specified Transaction itself. An amendment to the following effect, rendered in ISDA’s leaden prose, wouldn’t be out of the question:

“For the purposes of Section 5(a)(v) where any Specified Transaction is governed by a master agreement, an event will only be a Default Under Specified Transaction where it results in an early termination of all transactions outstanding under the documentation applicable to that Specified Transaction.”

Final payments

The reason for the second limb of the definition is to catch final payments, which can’t be accelerated as such, since they’re already due.

Differences between cross default and DUST

Ideally, cross default and DUST should be mutually exclusive. They are meant to dovetail with each other, not cross over. This will not stop mission creep from over-zealous credit departments, who will try to expand the scope of each, leading to all kinds of cognitive dissonances and righteous indignation from the counterparty’s negotiator. As ammunition for your fruitless attempts to persuade the credit department to live in the real world for once, try these:

• Cross default generally references indebtedness where the exercising counterparty has significant loan-type exposure to the defaulter; DUST references bilateral derivative and trading transactions which tend not to be in the nature of indebtedness (it is true to say that the line between these can be gray, especially in the case of uncollateralised derivative relationships;
• Cross default is only triggered once a certain threshold amount of indebtedness is defaulted upon; DUST is triggered upon any breach;
• Cross default references your Counterparty owes to a third party outside your control; DUST references other obligations your counterparty owes you or an affiliate you can reasonably be expected to be in league with. (ie you can't generally trigger if your counterparty defaults on Specified Transactions it has on with third parties)
• DUST only comes about if the Specified Transaction in question has been actually accelerated, whereas cross default is available whether the primary creditor has accelerated or not. (A cross default which requires acceleration is called “cross acceleration”.)