Template:Isda 9(c) summ

In which ISDA’s crack drafting squad™ grapple with the existential question: if I close out all my {{{{{1}}}|Transaction}}s because the other guy fundamentally breached the contract, can I still rely on the good bits of my contract to manage my risk position and enforce my bargain?

We are deep into ontological territory here, fellows. For while the same thing might be an {{{{{1}}}|Event of Default}} and a fundamental breach of contract — almost certainly will be, in fact — treating that event as an {{{{{1}}}|Event of Default}} is to see it as “infra-contractual action” being a circumstance contemplated by and provided for within the four corners of your compact; while if you see it as a fundamental breach you thereby cast your contract on the fire — what good are the promises in it, after all, if the other fellow won’t keep them? — and prostrate yourself at the feet of the Queen’s Bench Division for redress from among the golden threads developed by the common law. But these common law principles are about the contract, they are not rules of the contract. The contract itself it a smoldering husk.

Why does this matter here? Well, because netting, in a word. Here the fabulous nuances of the ISDA Master Agreement come into play. Close-out netting — as we all know, a clever if somewhat artificial and, in practical application, quite tedious concept — is not something that just happens by operation of the common law. Set-off, which does, is a narrower and flakier thing requiring all kinds of mutuality that might not apply to your ISDA Master Agreement.

The contractual device of close-out netting, by contrast, relies on the patient midwifery of ISDA’s crack drafting squad™ and the sophisticated contrivances they popped into the ISDA Master Agreement: especially the parts that say all {{{{{{1}}}|Transactions}} form a {{{{{{1}}}|Single Agreement}}, and those long and dusty passages in Section {{{{{1}}}|6}} which painfully recount how one terminates those Transactions and nets down all the resulting exposures should things go tits up.

Now, it really wouldn’t do if one were found to have thrown those clever legal artifacts on the fire before seeking the common law’s help to manage your way out of a portfolio with a busted counterparty would it. Section {{{{{1}}}|9(c)}} is there to avoid the doubt that you might have done so: Just because you’ve declared an {{{{{1}}}|Early Termination Date}}, that doesn’t mean all bets are off. Just the live {{{{{1}}}|Transactions}}.

As far as the JC can see, through his fogged-up, purblind spectacles, this doubt, like most, didn’t need avoiding and shouldn’t have been present in the mind of a legal eagle of stout mental fortitude: it is clear on its face that terminating a transaction under pre-specified mechanism in the contract is not to cancel the contract and sue for damages, but to exercise an option arising under it, and all your mechanical firepower remains in place.

Indeed, there is no mechanism for terminating an ISDA Master Agreement itself, at all. Even in peace-time. This has led at least one commentator to hypothesise that this proves that derivatives trading is all some kind of Illuminati conspiracy.