Template:Bankruptcy procedure

TL;DR

Here are all the stages you must go through between becoming entitled to terminate and settlement for a {{{{{1}}}|Failure to Pay or Deliver}}:

• T: There must be a {{{{{1}}}|Bankruptcy}} {{{{{1}}}|Event of Default}} on a day, T.
• T: You must send a Section {{{{{1}}}|6(a)}} notice designating an {{{{{1}}}|Early Termination Date}} for all outstanding {{{{{1}}}|Transaction}}s. It must be within 20 days. Let’s say it is the same day, for the hell of it
• T: You are “off risk” and must start calculating your {{{{{1}}}|Close-out Amount}}s for all outstanding {{{{{1}}}|Transaction}}s. You must do this as soon as reasonably practicable. Let’s say that takes another 30 days.
• T+30: having calculated all {{{{{1}}}|Close-out Amount}}s and totted them all up into a single {{{{{1}}}|Early Termination Amount}}: You send your Section {{{{{1}}}|6(d)}} statement advising of that amount, giving bank details and supplying your workings.
• T+31: Your {{{{{1}}}|Early Termination Amount}} is due.

In Full

So, to close out following a {{{{{1}}}|Bankruptcy}}, you will need:

1. There must be a {{{{{1}}}|Bankruptcy}} under Section {{{{{1}}}|5(a)(vii)}}

There are nine different types of bankruptcy under the ISDA. Most are formal, public events (regulator institutes bankruptcy proceedings, administrator appointed, etc — watch too for local regulator actions and bailins specified in the ISDA Master Agreement if your counterparty is a bank) that the would be widely known about. Others are less public and might happen more quickly. The ones most likely to happen first are:

• becoming unable to pay debts as they fall due or admitting it in writing
• making a composition with creditors
• a secured party enforcing against substantially all assets (though “substantially all assets” is a high bar, and would not be likely to apply to a significant financial insitution)

Unlike a {{{{{1}}}|Failure to Pay}}, you do not need to wait for the close of business, or any grace periods to expire. You may immediately send your notice designating an {{{{{1}}}|Early Termination Date}}. So let’s do that:

2. Send a Section {{{{{1}}}|6(a)}} notice designating an {{{{{1}}}|Early Termination Date}}

Section {{{{{1}}}|6(a)}} allows you, by not more than 20 days’ notice to designate an {{{{{1}}}|Early Termination Date}} for all outstanding {{{{{1}}}|Transaction}}s. So, at some point in the next twenty days outstanding {{{{{1}}}|Transaction}}s will be at an end. Now this is a different thing from knowing what the amounts will be, much less knowing when they will be paid: this is the date by reference to which termination amounts will be calculated. Usually, you will want to go “off risk” as quickly as possible, so the {{{{{1}}}|Early Termination Date}} will likely be the date you send your Section {{{{{1}}}|6(a)}} notice.

3. Determine {{{{{1}}}|Close-out Amount}}s

One must now ascertain termination values for the {{{{{1}}}|Terminated Transaction}}s as of the {{{{{1}}}|Early Termination Date}} per the methodology set out in Section {{{{{1}}}|6(e)(i)}}. Section 6(c) reminds us for the avoidance of doubt that even if the {{{{{1}}}|Event of Default}} which triggers the {{{{{1}}}|Early Termination Date}} evaporates in the meantime — these things happen, okay? — yon Defaulting Party’s goose is still irretrievably cooked. The trading and risk people need to come up with {{{{{1}}}|Close-out Amount}}s for all outstanding {{{{{1}}}|Transaction}}s. Now note, even though you have designated an {{{{{1}}}|Early Termination Date}} not more than 20 days from your Section {{{{{1}}}|6(a)}} notice, it may well take you a lot longer to close out your portfolio than that, and as long as you are acting in a commercially reasonable way, you can take longer. The 20 days’ notice period is a red herring. There is a longer essay about the meaningless of that 20-day time limit here. Once they have done that you are ready for your Section 6(e) notice.

4. Calculate and notify

The {{{{{1}}}|Early Termination Date}} is the date on which the {{{{{1}}}|Transaction}}s terminate; it is the date by reference to which you calculate their termination values, not the date by you have to have valued, much less settled outstanding amounts due as a result of their termination — that would be a logical impossibility for those not imbued with the power of foresight. Here we move onto Section {{{{{1}}}|6(d)}}, under which, as soon as is practicable after the {{{{{1}}}|Early Termination Date}}, your boffins work out all the termination values for each {{{{{1}}}|Transaction}}, tot them up to arrive at the Section 6(e) amount, and send a statement to the defaulting party, specifying the {{{{{1}}}|Early Termination Amount}} payable, the bank details, and reasonable details of calculations.

5. Pay your {{{{{1}}}|Early Termination Amount}}

Your in-house metaphysicians having calculated your {{{{{1}}}|Close-out Amount}}s, and assembled all the values into an {{{{{1}}}|Early Termination Amount}} the party who owes it must pay the {{{{{1}}}|Early Termination Amount}}. With ISDA’s crack drafting squad™’s yen for infinite particularity, this will depend on whether the {{{{{1}}}|Early Termination Date}} follows an {{{{{1}}}|Event of Default}} or a {{{{{1}}}|Termination Event}}. If the former, the {{{{{1}}}|Early Termination Amount}} is payable at once, as soon as the {{{{{1}}}|6(d)}} statement is deemed delivered; if a {{{{{1}}}|Termination Event}}, only two {{{{{1}}}|Local Business Day}}s — I know, right — after the {{{{{1}}}|6(d)}} statement is delivered (or, where there are two Affected Parties and both are delivering each other {{{{{1}}}|6(d)}} statements — I know, right — after both have done so).