Right to Terminate Following Event of Default - 1987 ISDA Provision
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1987 ISDA Interest Rate and Currency Exchange Agreement
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Crosscheck: 6(a) in a Nutshell™
Original text
See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.
Resources and Navigation
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Comparisons
Redlines
- 1987 ⇒ 1992: Redline of the ’92 vs. the ’87: comparison (and in reverse)
- 1992 ⇒ 2002: Redline of the ’02 vs. the ’92: comparison (and in reverse)
- 1987 ⇒ 2002: Redline of the ’92 vs. the ’87: comparison (and in reverse)
Discussion
No change in the Early Termination Date definition from 1992 ISDA to 2002 ISDA (no real surprise there) but the close-out methodology between the two versions, by which one works out what must be paid and by whom on an Early Termination Date, and which you are encouraged to follow in all its gory detail starting at Section 6(a), is really quite different, and notwithstanding the fact that the 2002 ISDA version was meant to address the many and varied complaints levelled by market practitioners at the 1992 ISDA we still find the 1992 version in use in the occasional market centred in unsophisticated rural backwaters like, oooh, I don’t know, New York.
Those with a keen eye will notice that, but for the title, Section 6(a) of the 2002 ISDA is the same as Section 6(a) of the 1992 ISDA and, really, not a million miles away from the svelte form of Section 6(a) in the 1987 ISDA — look on that as the Broadcaster to the 1992’s Telecaster. There is one key difference, though: the evolution of the Automatic Early Termination provision. And the 1987 ISDA saw no call to have a “Non-Defaulting Party”.
It has its own entire page — Automatic Early Termination — so we have refrained from discussing it here.
Basics
Automatic Early Termination
There is an entire, long-winded page about AET, so we have refrained from blathering on about it here.
Everyone’s hair will be on fire
This is likely to be a time where the market is dislocated, your credit officer is running around with her hair on fire, your normally affable counterparty is suddenly diffident, evasive, or strangely just not picking up the phone, and your online master agreement database has crashed because everyone in the firm is interrogating it at once. The sense of dreary quietude in which your Master Agreement was negotiated will certainly not prevail. Bear this in mind when negotiating. For example, the elaborate steps your counterparty insists on for your sending close-out notices, to fifteen different addresses, in five different formats and with magic words in the heading, will really trip your gears, especially if some of those methods are no longer possible. There is an argument that some buy-side counterparties complicate the formal process of closing out specifically to buy time and deter their dealers from pulling the trigger. It is a pretty neat trick, if so: you can expect the dealer’s credit department to puke all over a margin lockup, but a bit of fiddling around the edges of a Notices section? Sure, whatever.
Bear in mind, too: this is one time the commercial imperative will count for nothing. This is it: literally, the end game. If you close out there is no business: you are terminating your trading relationship altogether with extreme prejudice. The normal iterated game of prisoner’s dilemma has turned into a single round game. Game theorists will realise at once that the calculus is very different, and much, much less appealing.
So: good luck keeping your head while all around you are losing theirs.
Close-out sequence
Once you have designated an Early Termination Date for your ISDA Master Agreement, proceed to 6(c) to understand the Effect of Designation. Or learn about it in one place with the NC.’s handy cribsheet, “closing out an ISDA”.
The Notices provisions in Section 12 are relevant to how you may serve this notice. In a nutshell, in writing, by hand. Don’t email it, fax it, telex it, or send it by any kind of pony express or carrier pigeon unless your pigeon/pony is willing to provide an affidavit of service.
Defaulting Party
The key thing to notice here is that — in an uncharacteristically rather neat, understated bit of drafting — Defaulting Party encapsulates a party who has itself defaulted, or whose Credit Support Provider or Specified Entity has committed an act which amounts to an Event of Default for that counterparty to this ISDA Master Agreement. I know, I know, this doesn’t seem that big of a deal: this sort of thing that should be plain, obvious and go without saying — but it saves you a job when, in your peregrinations round the party’s Confirmation, you come to talk of pending Events of Default and Termination Events against that party.
Instead of saying, laboriously, “if there is an Event of Default or Termination Event with respect to a party or its Credit Support Providers or Specified Entities, as the case may be” you can speak of a Defaulting Party or an Affected Party.
Of course, it would be nice if there was a catch-all for a party who has committed an Event of Default or suffered a Termination Event, so you didn’t need to go “Defaulting Party or Affected Party, as the case may be” — cheekily we suggest “Innocent Party” and “Implicated Party” (“Guilty Party”, though fun, isn’t quite right, seeing as Termination Events aren’t meant to impute any kind of culpability).
Non-defaulting Party
To be compared with - well, Defaulting Party. Of all things. And Non-affected Party, as well. The difference between a Non-defaulting Party and a Non-affected Party, and the linguistic torture that distinction as inflicted on the race of ISDA lawyers ever since, says everything you need to know about the absurdity of modern commercial law.
- Do say: “the Non-defaulting Party or the non-Affected Party, as the case may be” over and over again.
- Don’t say: “Is there really no other way you could get across this concept, for crying out loud?”
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