Additional Termination Event - 1992 ISDA Provision
Content and comparisons
Numbering Discrepancy: Note the numbering discrepancy in Section 5(b) between the 1992 ISDA and 2002 ISDA. This is caused by a new 5(b)(ii) (Force Majeure Event) in the 2002 ISDA before Tax Event, which is thus shunted from Section 5(b)(ii) (in the 1992 ISDA) to Section 5(b)(iii) (in the 2002 ISDA).
Other than the numbering discrepancy and a daring change of a “shall” to a “will”, Section 5(b)(vi) of the 2002 ISDA is the same as Section 5(b)(v) of the 1992 ISDA. That said, ATEs are likely to be the most haggled-over part of your ISDA Master Agreement.
Additional Termination Events are the other termination events your Credit department has dreamt up for this specific counterparty, that didn’t occur to the framers of the ISDA Master Agreement — or, at any rate, weren’t sufficiently universal to warrant being included in the ISDA Master Agreement for all. While the standard Termination Events tend to be “non-fault” events which justify termination of the relationship on economic grounds, but not on terms necessarily punitive to the Affected Party, Additional Termination Events are more “credit-y”, more susceptible of moral outrage, and as such more closely resemble Events of Default than Termination Events.
Common ones include:
- NAV triggers (for hedge funds)
- Key man provisions (for hedge funds)
- Investment manager insolvency or loss of licence
- Parent divestment (where counterparty is a financing subsidiary)
There is a — well, contrarian — school of thought that Additional Termination Events better serve the interests of the Ancient Guild of Contract Negotiators and the Worshipful Company of Credit Officers than they do the shareholders of the institutions for whom these artisans practise their craft, for in these days of zero-threshold CSAs, the real credit protections in the ISDA Master Agreement are the standard Events of Default (especially Failure to Pay or Deliver and Bankruptcy).
It’s a fair bet no-one in the organisation will have kept a record of how often you pulled NAV trigger. It may well be never.
“Ahh”, your credit officer will say, “but it gets the counterparty to the negotiating table”.
A “Termination Event” is defined as “an Illegality, a Tax Event or a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event”. Therefore, adding any new Termination Event must ALWAYS be achieved by labelling it a new “Additional Termination Event” under Section 5(b)(vi) (under the 2002 ISDA) or 5(b)(v) (under the 1992 ISDA), and not a separate new Termination Event under a new Section 5(b)(vii), or anything like that.
If you try to make it into a new “5(b)(vii)” it is therefore neither an “Illegality”, “Tax Event”, “Tax Event Upon Merger”, “Credit Event Upon Merger” nor an “Additional Termination Event”. Read literally, is will not be caught by the definition of “Termination Event” and none of the Section 6(b) Right to Terminate following Termination Event provisions will bite on it.
I mention this because I have seen it happen. Yes, you can take a “fair, large and liberal view” that what the parties intended was to create an ATE, but, in our age of anxiety, why suffer that one?