Template:M summ 2002 ISDA 6(f)

One does not exercise a set-off right willy nilly. Unless one is, mutually, settlement netting (where on a given day I owe you a sum, you owe me a sum, and we agree to settle by one of us paying the other the difference) set-off is a drastic remedy which will be seen as enemy action. You would not do it, without agreement, to any client you expected to keep. So, generally, use set-off as a remedy it only arises following an event of default.

A bit of a bish in the 2002 ISDA

Set-off in the 2002 ISDA borrows from the text used to build it into the 1992 ISDA (see below) but still contains a rather elementary fluff. It imagines a world where the Early Termination Amount is payable one way, while all Other Amounts are only payable the other. Life, as any fule kno, is not always quite that convenient.

For example:

Payer owes Payee an Early Termination Amount of 10
Payee owes Payer Other Amounts of 50

Net: Payee owes Payer 40.

But what if there are Other Amounts payable the same way as the Early Termination Amount?

Payer owes Payee an Early Termination Amount of 10
Payer owes Payee Other Amounts of 40
Payee owes Payer Other Amounts of 50

Net: Payee owes Payer 40.
Whoops: Payee is still owed 40 by Payer so is an unsecured creditor

Not ideal. But fixable if you’re prepared to add some dramatically anal language:

6(f) Set-Off. Any Early Termination Amount (or any other amounts, whether or not arising under this Agreement, matured, contingent and irrespective of the currency, place of payment of booking of the obligation)” payable to one party (the “Payee”) by the other party (the “Payer”), ...