Bankruptcy - ISDA Provision
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2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™ 5(a)(vii) in all its glory
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Overview
Differences between 1992 ISDA and 2002 ISDA definitions of Bankruptcy
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[1] 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.
1987 ISDA
Note, for students of history, Automatic Early Termination is problematic under the 1987 ISDA.
Summary
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).[2]
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.
See also
- Insolvency and bankruptcy generally.
- Closing out a 2002 ISDA
- Closing out a 1992 ISDA
References
- ↑ “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.