General Conditions - ISDA Provision
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2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™
2(a) in all its glory
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Overview
The 1987 ISDA, being concerned only with interest rates and currency exchange, does not contemplate delivery, as such. Delivery implies non-cash assets. Therefore portions of 2(a)(i) and 2(a)(ii) were augmented in the 1992 ISDA to cater for this contingency. The 1992 ISDA also added a condition precedent to the flawed asset clause (Section 2(a)(iii)) that no Early Termination Date had been designated.
Thereafter Section 2(a) is identical in the 1992 ISDA and the 2002 ISDA. However the subsidiary definition of Scheduled Settlement Date — a date in which any Section 2(a)(i) obligations fall due — is a new and frankly uncalled-for innovation in the 2002 ISDA.
We have a special page dedicated to Section 2(a)(iii), by the way. That is a brute, and one of the most litigationey parts of the Agreement.
Summary
Section 2 contains the basic nuts and bolts of your obligations under the Transactions you execute. Pay or deliver what you’ve promised to pay or deliver, when you’ve promised to pay it or deliver it, and all will be well.
“Scheduled Settlement Date”
Though it doesn’t say so, at least in the 2002 ISDA the date on which you are obliged to pay or deliver an amount is the “Scheduled Settlement Date”. The ’02 definition only shows up only in Section 2(b) (relating to the time by which you must have notified any change of account details) and then, later, in the tax-related Termination Events (Tax Event and Tax Event Upon Merger). That said, “Scheduled Settlement Date” isn’t defined at all in the 1992 ISDA.
Section 2(a)(iii): the flawed asset provision
And then there’s the mighty flawed asset provision of Section 2(a)(iii). This won’t trouble ISDA negotiators on the way into a swap trading relationship — few enough people understand it sufficiently well to argue about it — but if, as it surely will, the great day of judgment should visit upon the financial markets again some time in the future, expect plenty of tasty argument, between highly-paid King’s Counsel who have spent exactly none of their careers considering derivative contracts, about what it means.
We have some thoughts on that topic, should you be interested, at Section 2(a)(iii).
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- The JC’s famous Nutshell™ summary of this clause
- “Flawed Assets” generally
- What is meant by “payments” and “deliveries”, related conceptual matters, especially as regards “delivery”
- Modern electronic clearance as a practical control
See also
- Flawed asset
- Section 2(a)(iii)