2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
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Section 5(b)(i) in a Nutshell™
Use at your own risk, campers!
Full text of Section 5(b)(i)
- 5(b)(i) Illegality. After giving effect to any applicable provision, disruption fallback or remedy specified in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement, due to an event or circumstance (other than any action taken by a party or, if applicable, any Credit Support Provider of such party) occurring after a Transaction is entered into, it becomes unlawful under any applicable law (including without limitation the laws of any country in which payment, delivery or compliance is required by either party or any Credit Support Provider, as the case may be), on any day, or it would be unlawful if the relevant payment, delivery or compliance were required on that day (in each case, other than as a result of a breach by the party of Section 4(b)):―
- 5(b)(i)(1) for the Office through which such party (which will be the Affected Party) makes and receives payments or deliveries with respect to such Transaction to perform any absolute or contingent obligation to make a payment or delivery in respect of such Transaction, to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or
- 5(b)(i)(2) for such party or any Credit Support Provider of such party (which will be the Affected Party) to perform any absolute or contingent obligation to make a payment or delivery which such party or Credit Support Provider has under any Credit Support Document relating to such Transaction, to receive a payment or delivery under such Credit Support Document or to comply with any other material provision of such Credit Support Document;
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As its clause numbering indicates, Illegality is a Section 5(b) Termination Event — being one of those irritating vicissitudes of life that are no-one’s fault but which mean things cannot go on, and not a Section 5(a) Event of Default, being those perfidious actions of one or other Party which bring matters to an end which, but for that behaviour, ought really to have been avoided.
Like a Force Majeure Event, an Illegality may only be triggered after exhausting the fallbacks and remedies specified in the 2002 ISDA.
Note the effect of section 6(b)(iv)(2) in the 2002 ISDA is to impose a Waiting Period of three Local Business Days before one acquires the right to terminate on account of an Illegality. There is no such waiting period in the 1992 ISDA.
Under the 2002 ISDA, Section 5(c) (Hierarchy of Events) intervenes to provide that (i) Illegality trumps Force Majeure and (ii) Illegality and Force Majeure both trump the Failure to Pay and Breach of Agreement Events of Default.
Given that Illegality is no longer subject to the “two Affected Parties” delay on termination (as it was in the 1992 ISDA), this is significant.
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