The Jolly Contrarian

Template:Isda 6(a) summ

Automatic Early Termination

There is an entire, long-winded page about {{{{{1}}}|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 {{{{{1}}}|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 {{{{{1}}}|Early Termination Date}} for your ISDA Master Agreement, proceed to {{{{{1}}}|6(c)}} to understand the {{{{{1}}}|Effect of Designation}}. Or learn about it in one place with the NC.’s handy cribsheet, “closing out an ISDA”.

The {{{{{1}}}|Notices}} provisions in Section {{{{{1}}}|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 {{{{{1}}}|Credit Support Provider}} or {{{{{1}}}|Specified Entity}} has committed an act which amounts to an {{{{{1}}}|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 {{{{{1}}}|Confirmation}}, you come to talk of pending {{{{{1}}}|Events of Default}} and {{{{{1}}}|Termination Event}}s against that party.

Instead of saying, laboriously, “if there is an {{{{{1}}}|Event of Default}} or {{{{{1}}}|Termination Event}} with respect to a party or its {{{{{1}}}|Credit Support Provider}}s or {{{{{1}}}|Specified Entities}}, as the case may be” you can speak of a {{{{{1}}}|Defaulting Party}} or an {{{{{1}}}|Affected Party}}.

Of course, it would be nice if there was a catch-all for a party who has committed an {{{{{1}}}|Event of Default}} or suffered a {{{{{1}}}|Termination Event}}, so you didn’t need to go “{{{{{1}}}|Defaulting Party}} or {{{{{1}}}|Affected Party}}, as the case may be” — cheekily we suggest “{{{{{1}}}|Innocent Party}}” and “{{{{{1}}}|Implicated Party}}” (“Guilty Party”, though fun, isn’t quite right, seeing as {{{{{1}}}|Termination Event}}s aren’t meant to impute any kind of culpability).

Non-defaulting Party

To be compared with - well, {{{{{1}}}|Defaulting Party}}. Of all things. And {{{{{1}}}|Non-affected Party}}, as well. The difference between a {{{{{1}}}|Non-defaulting Party}} and a {{{{{1}}}|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 {{{{{1}}}|Non-defaulting Party}} or {{{{{1}}}|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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