The Jolly Contrarian

Template:Isda 6 comp

Redlines

Discussion

See section 12 for what this all means in a time of global pandemic lockdown. See also the separate article all about {{{{{1}}}|Automatic Early Termination}}, which features in the 1992 ISDA and the 2002 ISDA and deserves a page all of its own.

Section 6(a)

Redlines

Discussion

No change in the {{{{{1}}}|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 {{{{{1}}}|Early Termination Date}}, and which you are encouraged to follow in all its gory detail starting at Section {{{{{1}}}|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 {{{{{1}}}|Automatic Early Termination}} provision. And the 1987 ISDA saw no call to have a “Non-Defaulting Party”.

It has its own entire page — {{{{{1}}}|Automatic Early Termination}} — so we have refrained from discussing it here.

Section 6(b)

Between the 1987 ISDA and the 1992 ISDA the changes were very superficial, as this comparison demonstrates.

Between the 1992 ISDA and the 2002 ISDA, there was a but more re-engineering, largely to account for the new Force Majeure Event and some tidying up, but beyond that Section {{{{{1}}}|6(b)}} works in the same general way under the 1992 ISDA and 2002 ISDA. Here is a comparison of that.

Section 6(b)(i)

Updated in 2002 with special pleadings relating to the newly-introduced Force Majeure Termination Event.

Section 6(b)(ii)

Note in the 2002 ISDA there is no reference to {{{{{1}}}|Illegality}} (or for that matter Force Majeure, which did not exist under the 1992 ISDA but tends to treated rather like a special case of Illegality and therefore, we think, would have been included in this provision of the 1992 ISDA if it had existed ... if you see what I mean).

When the 2002 ISDA gets on to the topic of Illegality and Force Majeure it allows the {{{{{1}}}|Unaffected Party}} to cherry-pick which Affected Transactions it will terminate, but then seems almost immediately to regret it (see especially in Section 6(b)(iv)). Under the 1992 ISDA if you wanted to pull the trigger on any Termination Event, you had to pull all {{{{{1}}}|Affected Transaction}}s. Under the 2002 ISDA it is only binary for the credit- and tax-related {{{{{1}}}|Termination Event}}s.

Otherwise, but for one consequential change — 1992’s “excluding” became 2002’s “other than” — I mean, you can just imagine the barney they must have had in the drafting committee for that one, can’t you — the provisions are identical.

Section 6(b)(iii)

Be careful here: Under the 1992 ISDA, if your Failure to Pay is also an Illegality it is treated as an Illegality: if there are two Affected Parties you will face a significant delay when closing out. A bit of a trick for young players.

Note also that reference to Illegality has been excised from the 2002 ISDA version. They changed this because, in practice, it turned out to too be hard to implement a transfer or amendment after an Illegality. Folks realised that if an Illegality happens you don’t want to have to wait 30 days to terminate, especially if you can’t rely on 2(a)(iii) to withhold payments in the meantime.

Section 6(b)(iv)

Oh, this section 6(b)(iv) stuff
Is sure stirring up some ghosts for me.
She said, “There’s one thing you gotta learn
Is not to be afraid of it.”
I said, “No, I like it, I like it, it’s good.”
She said, “You like it now —
But you’ll learn to love it later”

— Robbie Robertson[1]

One’s right to terminate early following an Illegality or the newly introduced Force Majeure Termination Event get a proper makeover in the 2002 ISDA, but otherwise, the provisions are the same, but for some formal fiddling in the drafting.

Section 6(c)

The framers of the 2002 ISDA daringly changed a “shall” to a “will” in the final line. We approve, to be clear, but this is kind of out of character for ISDA’s crack drafting squad™. Otherwise, identical.

Section 6(d)

Broadly similar between the versions. Main differences are basic architectural ones (no definition of “Early Termination Amount” or “Close-out Amount” in the 1992 ISDA, for example), and the 2002 is a little more finicky, dealing with what to do if there are two Affected Parties, and also blithering on for a few lines about interest.

Section 6(e)

Redlines

Discussion

The 1987 ISDA was half-cocked and shambolic, and laboured under the wishful illusion that if the other guy blew up, even if he was in the money, it was kind of okay to just flip him the bird and walk off with a windfall (in the form of not owing him the money you like, actually owed him). Not cool these days. Once folks realised this wouldn’t fly from a netting perspective they tried to fix it in the 1992 ISDA, whose close-out methodology is truly hideous.

ISDA’s crack drafting squad™ overhauled whole close-out process, soup to nuts, in the 2002 ISDA, and is now much more straightforward — as far as you could ever say that about ISDA’s crack drafting squad™’s output. But a large part of the fanbase — that part west of Cabo da Roca — sticks with the 1992 ISDA. Odd.

Differences, in very brief:

The 1992 ISDA has the infamous Market Quotation and Loss measures of value, and the perennially-ignored First Method and the more sensible Second Method means of evaluating the termination value of terminated {{{{{1}}}|Transactions}}. The 2002 ISDA has just the Close-out Amount to cover everything. So while the 1992 ISDA is far more elaborate and over-engineered, this is not to deny that the 2002 ISDA is elaborate or over-engineeered.

The 2002 ISDA has a new Section 6(e)(iv) dealing with Adjustment for Illegality or Force Majeure Event. This wasn’t needed in the 1992 ISDA, which didn’t have Force Majeure Event at all, and a less sophisticated Illegality.

  1. ↑ Okay he didn’t say the bit about Section 6(b)(iv)
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