Events of Default (Early Termination Payments) - ISDA Provision
The effect of this is that in closing out an ISDA, the first step is to terminate all transactions to arrive at a Close-out Amount[1] for each one, then figure out if there were any Unpaid Amounts that were due under Transactions but had not been paid at the time the Transactions terminated. The close out happens under Section 6(e) of the ISDA Master Agreement itself and the recourse is to a net sum. Netting does not happen under the Transactions — on the theory of the game there are no outstanding Transactions at the point of netting; just payables.
Therefore, if your credit support (particularly guarantees or letters of credit) explicitly reference amounts due under specific Transactions, you may lose any credit support at precisely the point you need it.
Which would be a bummer.
Further commentary on the Guarantee page.
See also
References
- ↑ The Close-out Amont is basically the replacement cost for the Transaction, and will therefore assume past payments have all been made. Hence the converse concept of “Unpaid Amounts”, being amounts that should have been paid or delivered under the Transaction by termination, but weren’t (hence, we presume, why good sir is closing out the ISDA Master Agreement in the first place). Note that, to avoid the fear of double-counting, the definition of “Close-out Amount” explicitly ignores the effect of any Unpaid Amounts under a Transaction.