2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
5(a)(vii) in a Nutshell™
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5(a)(vii) in all its glory
- 5(a)(vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:―
- (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger);
- (2) becomes insolvent or is unable to pay its debts or fails 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;
- (A) institutes or has instituted against it, by a regulator, supervisor or any similar official with primary insolvency, rehabilitative or regulatory jurisdiction over it in the jurisdiction of its incorporation or organisation or the jurisdiction of its head or home office, 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 its winding-up or liquidation by it or such regulator, supervisor or similar official, or
- (B) 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 its winding-up or liquidation, and such proceeding or petition is instituted or presented by a person or entity not described in clause (A) above and either
- (I) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or
- (II) is not dismissed, discharged, stayed or restrained in each case within 15 days of the institution or presentation thereof;
- (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger);
- (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets;
- (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 15 days thereafter;
- (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) above (inclusive); or
- (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or
Related agreements and comparisons
Resources and Navigation
There are two:
- Slightly more specific concept of insolvency: firstly, in limb 4 (insolvency proceedings) a new limb (A) has been included to cover action taken by an entity-specific regulator or supervisor (as opposed to a common or garden insolvency proceeding): If initiated by a regulator, the game’s up as soon as the action is taken. If initiated by a random, the action must have resulted in a winding-up order, or at least not have been discharged in 15 (not 30) days.
- Contracted grace period: The allowable period for dismissal of an insolvency petition (under 5(a)(vii)(4)) or the exercise of security over assets (under 5(a)(vii)(7)) is compressed from 30 days to 15 days. This, in aggregate over the whole global market, keeps many a negotiator in meaningful employment, and you will see many large organisations, whom you’d think would know better, amending these grace periods back to the 1992 ISDA standard of 30 days or better still, insisting on sticking with a 1992 ISDA, but upgrading every part of it to the 2002 ISDA except for the Bankruptcy and Failure to Pay grace periods. This is a simply spectacular use of ostensibly limited resources.
Regional bankruptcy variations
The Germanic lands have peculiar ideas when it comes to bankruptcy — particularly as regards banks, so expect to see odd augmentations and tweaks to ISDA’s crack drafting squad™ standard language. Will these make any practical difference? Almost certainly not: it is hard to see any competent authority in Germany, Switzerland or Austria — storeyed nations all, in the long history of banking, after all — not understanding how to resolve a bank without blowing up its netting portfolio. Especially since Basel, where the netting regulations were formulated, is actually in Switzerland.
Note, for students of history, Automatic Early Termination is problematic under the 1987 ISDA.
ISDA’s is the market standard way of defining “bankruptcy”
The ISDA bankruptcy definition is rarely a source of great controversy (except for the grace period, which gets negotiated only through custom amongst ISDA negotiators because, in its wisdom, ISDA’s crack drafting squad™ thought fit to halve it from 30 days to 15 in the 2002 ISDA.
So you have a sort of pas-de-deux between negotiators where they argue about it for a while before getting tired, being shouted at by their business people, and moving on to something more important to argue about, like Cross Default).
Otherwise, the ISDA bankruptcy clause is a much loved and well-used market standard and you often see it being op-opted into other trading agreements precisely because everyone knows it and no one really argues about it.
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- The JC’s famous Nutshell™ summary of this clause
- The complicating fact of Posted Margin on all of this, and the vexed question of who is actually in the money, which might not be obvious.
- A guide to closing out on a Bankruptcy Event of Default for those in a hurry.
- A more gently-paced step-by-step guide for those who have more time, and for whom the world is not presently exploding.
- ↑ “meaningful” is in the eye of the beholder, you understand.
- ↑ This, by the way, is an ISDA In-joke. In fact, Cross Default is pretty much pointless, a fact that every ISDA lawyer and credit officer knows, but none will admit on the record.