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1987 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
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Section 5(a)(vii) in a Nutshell™
Use at your own risk, campers!
Full text of Section 5(a)(vii)
- 5(a)(vii) Bankruptcy. The party or any applicable Specified Entity:–
- (1) is dissolved;
- (2) becomes insolvent or fails or is unable or admits in writing its inability generally to pay its debts as they become due;
- (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors;
- (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for the winding-up or liquidation of the party or any such Specified Entity, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition
- (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for the winding-up or liquidation of the party or such Specified Entity or
- (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof;
- (5) has a resolution passed for its winding-up or liquidation;
- (6) seeks or becomes subject to the appointment of an administrator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets (regardless of how brief such appointment may be, or whether any obligations are promptly assumed by another entity or whether any other event described in this clause (6) has occurred and is continuing);
- (7) any event occurs with respect to the party or any such Specified Entity which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (6) (inclusive); or
- (8) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts;
- other than in the case of clause (1) or (5) or, to the extent it relates to those clauses, clause (8), for the purpose of a consolidation, amalgamation or merger which would not constitute an event described in (viii) below; or
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Summary
Close-out netting under the 1987 ISDA
It can be done, but tread carefully: the somewhat agricultural Automatic Early Termination provision may cause problems. Generally speaking:
- Physical settlement: given that the 1987 ISDA doesn’t include physical delivery provisions, if you have any physically settled trades under it, you’d need to add boilerplate language in the master to ensure the close-out mechanic worked for them.
- Bankruptcy and Automatic Early Termination: section 5(a)(vii) is loosely drafted and includes events which it may be difficult to determine with accuracy (esp. subsections (2), (7), and (8). This would be okay, except for the way Automatic Early Termination works under the 1987 ISDA:
- it happens by default (by contrast, in the 1992 ISDA and 2002 ISDA it is an election, and you would only apply it to counterparties in those jurisdictions where it was needed to ensure close-out netting)
- it happens by reference to all of the limbs of the Bankruptcy definition, including those which are observable and definitive. AET shouldn't kick in simply where a party "takes steps in furtherance of" an insolvency filing - it should only happen at the point of that actual insolvency filing.
- That is to say the second sentence of Section 6(a) (see below) deems the occurrence of an Early Termination Date automatically upon the occurrence of any event falling within the Bankruptcy definition.
By contrast, Automatic Early Termination under the 1992 ISDA and 2002 ISDA does not apply to those events that are uncertain as to the precise time of their occurrence. Therefore, the enforceability of Automatic Early Termination in the 1992 ISDA and the 2002 ISDA cannot be called into question based on the uncertainty created by the inclusion of the events in the 1992 ISDA and 2002 ISDA equivalent to those in the 1987 ISDA referred to above.
See also
References