1987 ISDA Interest Rate and Currency Exchange Agreement
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5(a) in a Nutshell™
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Original text
5(a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Specified Entity of such party, of any of the following events constitutes an event of default (an “Event of Default”) with respect to such party:-
- 5(a)(i) Failure to Pay. Failure by the party to pay, when due, any an10unt required to be paid by it under this Agreement if such failure is not remedied on or before the third Business Day after notice of such failure to pay is given to the party;
- 5(a)(ii) Breach of Agreement. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to pay any amount required to be paid by it under this Agreement or to give notice of a Termination Event or any agreement or obligation under Section 4(a)(i) or 4(d)) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party;
- 5(a)(iii) Credit Support Default.
- (1) Failure by the party or any applicable Specified Entity to comply with or perform any agreement or obligation to be complied with or performed by the party or such Specified Entity in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed;
- (2) the expiration or termination of such Credit Support Document, or the ceasing of such Credit Support Document to be in full force and effect, prior to the final Scheduled Payment Date of each Swap Transaction to which such Credit Support Document relates without the written consent of the other party; or
- (3) the party or such Specified Entity repudiates, or challenges the validity of, such Credit Support Document;
- 5(a)(iv) Misrepresentation. A representation (other than a representation under Section 3(e) or (f)) made or repeated or deemed to have been made or repeated by the party or any applicable Specified Entity in this Agreement or any Credit Support Document relating to this Agreement proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated;
- 5(a)(v) Default under Specified Swaps. The occurrence of an event of default in respect of the party or any applicable Specified Entity under a Specified Swap which, following the giving of any applicable notice or the lapse of any applicable grace period, has resulted in the designation or occurrence of an early termination date in respect of such Specified Swap;
- 5(a)(vi) Cross Default. If “Cross Default” is specified in Part I of the Schedule as applying to the party,
- (1) the occurrence or existence of an event or condition in respect of such party or any applicable Specified Entity under one or more agreements or instruments relating to Specified Indebtedness of such party or any such Specified Entity in an aggregate amount of not less than the Threshold Amount (as specified in Part 1 of the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or
- (2) the failure by such party or any such Specified Entity to make one or more payments at maturity in an aggregate amount of not less than the Threshold Amount under such agreements or instruments (after giving effect to any applicable grace period);
- 5(a)(vii) Bankruptcy. The party or any applicable Specified Entity:–
- (1) is dissolved;
- (2) becomes insolvent or fails or is unable or admits in writing its inability generally to pay its debts as they become due;
- (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors;
- (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for the winding-up or liquidation of the party or any such Specified Entity, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition
- (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for the winding-up or liquidation of the party or such Specified Entity or
- (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof;
- (5) has a resolution passed for its winding-up or liquidation;
- (6) seeks or becomes subject to the appointment of an administrator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets (regardless of how brief such appointment may be, or whether any obligations are promptly assumed by another entity or whether any other event described in this clause (6) has occurred and is continuing);
- (7) any event occurs with respect to the party or any such Specified Entity which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (6) (inclusive); or
- (8) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts;
- other than in the case of clause (1) or (5) or, to the extent it relates to those clauses, clause (8), for the purpose of a consolidation, amalgamation or merger which would not constitute an event described in (viii) below; or
- 5(a)(viii) Merger Without Assumption. The party consolidates or amalgamates with, or merges into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer:-
- (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party under this Agreement by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or
- (2) the benefits of any Credit Support Document relating to this Agreement fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement.
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Resources and Navigation
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Comparisons
Redlines
Discussion
This is a landing page for all the ISDA’s many and varied Events of Default. Since there are eight of them, and all of them have their own little idiosyncrasies, we have not tried to discuss individual items in great detail on this page, but have given them their own pages. These are here:
- 5(a)(i) Failure to Pay or Deliver
- 5(a)(ii) Breach of Agreement
- 5(a)(iii) Credit Support Default
- 5(a)(iv) Misrepresentation
- 5(a)(v) Default Under Specified Transaction
- 5(a)(vi) Cross Default
- 5(a)(vii) Bankruptcy
- 5(a)(viii) Merger Without Assumption
Here we will discuss them in the round as it were. As a collective.
Basics
Events of Default can generally be contrasted with Termination Events. They tend to be more focused on the outright creditworthiness of the Defaulting Party: whether it could, even if it wanted to, perform its obligations. Termination Events on the other hand tend to be extraneous factors preventing a party from continuing the contract (Or making the contract uneconomic) even though it has the financial resources to do so.
The broad thrust of the Events of Default is:
- Direct failures under the Master Agreement itself: Direct contraventions of the ISDA Master Agreement itself and its Transactions by one of the principals to the contract. Within here we have:
- Failure to Pay, which became Failure to Pay or Deliver when the cash-only 1987 ISDA gave way to the broader range of non-cash underlying assets under the 1992 ISDA;
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Breach of Agreement: Breach of any obligation other than a payment or delivery obligation
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Misrepresentation: Breach of any cross-my-heart-and-hope-to-die sort of precontractual representation made undere the contract
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Credit Support Default: Failure to provide collateral under a Credit Support Document. While in ordinary banking world a credit support obligation would generally be provided by someone other than a party to the contract. This is not so on Planet ISDA: (some) CSAs and CSDs are “Credit Support Documents”. So this counts as these are mainly principal obligations of the parties themselves (though of course end users will often be guaranteed).
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Direct failures under other Agreements: Direct contraventions by parties to the ISDA Master Agreement of other contractual obligations that are sufficiently serious to make the Non-Defaulting Party freak under the ISDA Master Agreement. Within this bucket we have:
- Default under Specified Transaction: The Defaulting Party fails directly to the Non-Defaulting Party to perform under a swap-like transaction, only one that is not documented under the ISDA Master Agreement itself, but under a different master trading agreement;
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Cross Default: The Defaulting Party fails directly to the Non-Defaulting Party to perform to someone else altogether under a loan-like Transaction, over a certain Threshold Amount;
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Unacceptable credit deterioration: The Defaulting Party or its third-party Credit Support Providers suffers a dramatic non-transactional reversal of fortunes such that the Non-Defaulting Party has credible doubts it will ever see its net in-the-money positions realised, whether or not they are currently in-the-money. Into this bucket goes:
- Bankruptcy: The Defaulting Party suffers one of the many different ways a merchant can go titten hoch. There are a lot of them, and they are fraught;
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Merger Without Assumption: The Defaulting Party is somehow taken over, reincorporated, reconstituted through a corporate event or otherwise magicked into a spiritual realm in which its earthly debts and obligations are not taken up by whomever the resulting entity is.
Events of Default by nature, speak to fundamental and time-honoured verities of the financial system, so it should not be a great surprise that they have not really changed throughout the three major versions of the ISDA Master Agreement.
Honourable mention should also go to the Additional Termination Events that credit department will insist on shoehorning into the schedule in a bid to stay relevant: while these are not Events of Default as such, they tend to have a same credit-related quality to them
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See also
References