Events of Default - NY VM CSA Provision

2016 ISDA Credit Support Annex (VM) (New York law) A Jolly Contrarian owner’s manual™ Resources and navigation Resources Wikitext | Nutshell wikitext Navigation 1 (Interpretation) | 2 (Security Interest) | 3 (Credit Support Obligations) | 4 ( Conditions Precedent, Transfer Timing, Calculations and Substitutions) | 5 (Dispute Resolution) | 6 (Holding and Using Posted Collateral (VM)) | 7 (Events of Default) | 8 (Certain Rights and Remedies) | 9 (Representations) | 10 (Expenses) | 11 (Miscellaneous) | 12 (Definitions) | 13 (Elections and Variables) Index: Click ᐅ to expand: 2016 NY VM CSA Paragraph 7 in a Nutshell™ Use at your own risk, campers! Paragraph 7 Events of Default Under Section 5(a)(iii)(1), it will be an Event of Default for a party if: 7(i) Fails to Transfer Collateral: it (or its Custodian (VM)) fails to Transfer any Eligible Collateral (VM), Posted Collateral (VM) or the Interest Payment (VM) when due and that failure continues for two Local Business Days after it receives notice of that failure; 7(ii) Impermissible dealing: it continuously fails to comply with any restriction in this Annex on its rights to rehypothecate or take title to Posted Collateral under Paragraph 6(c) for five Local Business Days after it receives notice of that failure; or 7(iii) Other breach of Annex: it continuously breaches any other obligation under this Annex for 30 days after it receives notice of its breach. view template Full text of Paragraph 7 Paragraph 7 Events of Default For purposes of Section 5(a)(iii)(1) of this Agreement, an Event of Default will exist with respect to a party if: 7(i) that party fails (or fails to cause its Custodian (VM)) to make, when due, any Transfer of Eligible Collateral (VM), Posted Collateral (VM) or the Interest Payment (VM), as applicable, required to be made by it and that failure continues for two Local Business Days after notice of that failure is given to that party; 7(ii) that party fails to comply with any restriction or prohibition specified in this Annex with respect to any of the rights specified in Paragraph 6(c) and that failure continues for five Local Business Days after notice of that failure is given to that party; or 7(iii) that party fails to comply with or perform any agreement or obligation other than those specified in Paragraphs 7(i) and 7(ii) and that failure continues for 30 days after notice of that failure is given to that party. view template Related agreements and comparisons Related Agreements Click here for the text of Section 7 in the 1994 New York law CSA Click here for the text of Section 6 in the 1995 English Law CSA Click here for the text of Section 6 in the 2016 English Law VM CSA Comparisons Template:2nycsadiff 7 2016 VM CSA and 2016 NY Law VM CSA: click for comparison 1995 CSA and 2016 VM CSA: click for comparison Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Content and comparisons

Quite different to the default provision under the 2016 VM CSA, because like all NY CSAs, the 2016 NY Law VM CSA version is not a Transaction. This means it needs to have its own Events of Default clause, rather than piggy-backing off the ISDA Master Agreement. It also has its own grace period, which defaults to two Local Business Days.

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Summary

Quite different to the default provision under the 2016 VM CSA, because the NY version is not a Transaction. This means it needs to have its own Events of Default clause, rather than piggy-backing off the ISDA Master Agreement. It also has its own grace period, which defaults to two Local Business Days.

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ISDA 2016 English Law VM Credit Support Annex A Jolly Contrarian owner’s manual™ Go premium Overview — Summary — Premium — See also — Wikitext Crosscheck: →NY OG →Eng OG →NY VM →Eng VM →Eng IM Events of Default in a Nutshell™ The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack. You can even ask questions! Ask about it here. Original text 6. Default. If an Early Termination Date is designated or deemed to occur as a result of an Event of Default in relation to a party, an amount equal to the Value of the Credit Support Balance (VM), determined as though the Early Termination Date were a Valuation Date, will be deemed to be an Unpaid Amount due to the Transferor (which may or may not be the Defaulting Party) for purposes of Section 6(e). For the avoidance of doubt (a) any Market Quotation determined under Section 6(e) in relation to the Transaction constituted by this Annex will be deemed to be zero, (b) any Loss determined under Section 6(e) in relation to the Transaction constituted by this Annex will be limited to the Unpaid Amount representing the Value of the relevant Credit Support Balance (VM) and any unsatisfied obligations with respect to the transfer of an Interest Payment (VM); (c) any Close-out Amount determined under Section 6(e) in relation to the Transaction constituted by this Annex will be deemed to be zero; and (d) no Unpaid Amount will be determined with respect to an unsatisfied obligation under Paragraph 2 and Paragraph 3(c). The varieties of ISDA CSA Subject 1994 NY 1995 Eng 2016 VM NY 2016 VM Eng 2018 IM Eng Preamble Pre Pre Pre Pre Pre Interpretation 1 1 1 1 1 Security Interest 2 - 2 - 2 Credit Support Obligations 3 2 3 2 3 Transfers, Calculations and Exchanges - 3 - 3 - Conditions Precedent, Transfer Timing, Calculations and Substitutions 4 - 4 - 4 Dispute Resolution 5 4 5 4 5 Holding and Using Posted Collateral 6 - 6 - 6 Transfer of Title, No Security Interest - 5 - 5 - Events of Default 7 6 7 6 7 Rights and Remedies 8 - 8 - 8 Representations 9 7 9 7 9 Expenses 10 8 10 8 10 Miscellaneous 11 9 11 9 11 Definitions 12 10 12 10 12 Elections and Variables 13 11 13 11 13 Resources and Navigation Index: Click ᐅ to expand: CSA

Comparisons

Transatlantic differences

Unlike the English law CSAs, the NY law CSAs, are not “Transactions” under the ISDA Master Agreement but separate Credit Support Documents. This means they need their own Events of Default, with grace periods, and cannot piggy-back off those in the ISDA Master Agreement.

Basics

Grace periods

Those of ISDA credit support arrangements that are standalone Credit Support Documents — the 1994 NY CSA, 2016 NY Law VM CSA and the 2018 English law IM CSD, but not the 1995 CSA and the 2016 VM CSA — bake in their own two Local Business Day grace period into their own customised Events of Default.

The 1995 CSA and 2016 VM CSA, being Transactions, don’t need to and inherit the grace periods for the Events of Default in the ISDA Master Agreement.

That can, at the limit, create a dissonance for Americans and IM posters, as your CSA grace periods do not automatically track your ISDA ones. Two Local Business Days is an LBD longer than the standard one LBD grace period in the 2002 ISDA, and an LBD shorter than the standard 3 LBD grace period baked into the 1992 ISDA.

Which is nice. This is not a problem for the English law Credit Support Annexes that are Transactions.

Including “comprehensive” Termination Events

Consider expanding of the Default provision to include “Termination Events where all Transactions are Affected Transactions”. This is as per Section 3.2 of the 2001 ISDA Margin Provisions which recommend that Paragraph 6 of the CSA should apply where all Transactions are closed out following an Event of Default or “Specified Condition” — the latter of which is defined to include the Termination Events listed under the ISDA Master Agreement. All Transactions would likely be Affected Transactions should a Credit Event Upon Merger or Additional Termination Event occur.

The default paragraph explains how you value the 2016 VM CSA itself — being a Transaction in its own right, of course — when closing out an ISDA Master Agreement. The basic gist is that you treat the Credit Support Balance as of the Early Termination Date — being the total value of the Credit Support you have ponied up at any time — as an Unpaid Amount, rather than treating is as a contingent return obligation, the present value of which would go into the Close-Out Amount (or Loss, or Market Quotation, if you still labour under an antediluvian 1992 ISDA).

Why do title transfer CSAs reference “Unpaid Amounts”?

A title transfer CSA is technically a Transaction under the ISDA Master Agreement in its own right — that is deep ISDA lore — but it is still a weird Transaction, and the standard “replacement cost” of valuation method doesn’t work brilliantly: rather than having defined payments upfront, each of which can be valued and discounted back to now to reveal a present value, payment obligations under a title transfer CSA depend on the aggregate discounted cashflows of all the other Transactions under the ISDA Master Agreement. So good luck determining, in the abstract, the replacement cost of something like that.

The good news is you don’t have to: the Credit Support Balance isn’t calculated by reference to its own discounted future cashflows: rather, it is just the inverse of the aggregate present value of all the other Transactions under the ISDA Master Agreement. So the “replacement cost” on any day is just the prevailing value of the Credit Support Balance. It’s easier to treat that as an Unpaid Amount (none of this tedious mucking about with replacement costs and so on).

But that means you have to deem the Close-Out Amount (or Market Quotation/Loss, if under a 1992 ISDA) as zero.

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