Right to Terminate - ISDA Provision
2002 ISDA Master Agreement
Section 6(b)(iv) in a Nutshell™
Use at your own risk, campers!
Full text of Section 6(b)(iv)
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Oh, this section 6(b)(iv) stuff
Is sure stirring up some ghosts for me.
She said, “There’s one thing you gotta learn
Is not to be afraid of it.”
I said, “No, I like it, I like it, it’s good.”
She said, “You like it now —
But you’ll learn to love it later”
- — Robbie Robertson
One’s right to terminate early following an Illegality or the newly introduced Force Majeure Termination Event get a proper makeover in the 2002 ISDA, but otherwise, the provisions are the same, but for some formal fiddling in the drafting.
The additions for Illegality and Force Majeure in the 2002 ISDA afford spectacular insight into the paranoid mind of ISDA’s crack drafting squad™, and the sort of rabbit hole one can find oneself falling down if one tries to over-think disaster scenarios. The contingencies the new wording addresses — none of which really bear much resemblance to the commercial world — are as follows:
- What happens if a party early terminates only some, but not all, Affected Transactions — which, sure, it is entitled to do but nonetheless, in most cases, would be a dick move: here the terminating party must give two extra Local Business Days’ notice over what it would have to give if it were terminating all Affected Transactions, to allow the Affected Party to respond to the notice closing out the remaining Affected Transactions.
- Being clear that where an Illegality or Force Majeure relates to a Credit Support Document, only the beneficiary of the afforded by that Credit Support Document can call for early termination. This stands to reason since the guaranteed party does not itself suffer any loss as a result of the failure of that credit support document, so should not be entitled to use it as an excuse to terminate Transactions (well — not unless and until that beneficiary has been a dick as contemplated above and terminated only some of the Affected Transactions. At this point, all bets are off.
What a beast. If you track it through in nutshell terms, it isn’t as bad as it looks, but you have the ISDA ninja’s gift for over-complication, and ISDA’s crack drafting squad™’s yen for dismal drafting, to thank for this being the trial it is.
To make it easier, we’ve invented some concepts and taken a few liberties:
- “Unaffected Transaction” — saves you all that mucking around saying “Transactions other than those that are, or are deemed, to be Affected Transactions” and so on);
- Termination Event Notice as an elegant and self-explanatory alternative to “after an Affected Party gives notice under Section 6(b)(i)”
- We take it as logically true that you can’t give 20 days’ notice of something which you then say will happen in fewer than 20 days. Therefore, there is no need for all this “designate a day not earlier than the day such notice is effective” nonsense.
So with that all out the way, here is how it works. Keep in mind that, unlike Events of Default, Termination Events can arise through no fault of the Affected Party and, therefore, are not always as apocalyptic in consequence. Depending what they are, they may be cured, worked around, and dented Transactions that casn’t be panelbeaten back into shape may be surgically trimmed out, allowing the remainder of the ISDA Master Agreement, and all Unaffected Transactions under it, to carry on as normal. So here goes:
Divide up the types of Termination Event
- Tax ones: If a Tax Event or a TEUM where the party merging is the one that suffers the tax, the parties have a month to try to rearrange matters between them, their offices and affiliates to avoid the tax issue. Only once that has failed are you in Termination Event territory. See Section 6(b)(ii) and 6(b)(iii).
- Non-Affected Party ones: If it’s a CEUM, an ATE or a TEUM where the Non-Affected Party suffers the tax, then if the other guy is a Non-Affected Party, then (whether or not you are) you may designate an Early Termination date for the Affected Transactions.
- Illegality and Force Majeure: Here, if you are on a 2002 ISDA, there may be a Waiting Period to sit through, to see whether the difficulty clears. For Force Majeure Event it is eight Local Business Days; for Illegality other than one preventing performance of a Credit Support Document: three Local Business Days. So, sit through it. Why is there exception for Illegality on a Credit Support Document? Because, even though it wasn’t your fault, illegality of a Credit Support Document profoundly changes your credit assessment (in a way that arguably, even a payment or delivery obligation doesn’t), and that is the most fundamental risk you are managing under the ISDA Master Agreement.
I know, I know, I know: to a thoroughbred ISDA ninja, repackaging SPVs are non-canonical heretical fan fiction and we shouldn’t really even talk about them, but still: when perusing part 1 of a repack SPV’s schedule you may see statements like this:
This is just a tacit recognition that the swap in a repackaging structure is part of a greater whole, and there are people depending on it (viz., noteholders) and who care about it more than the actual counterparty to the swap (which is, after all, a mindless espievie), but who, by dint of their shadowy and anonymous existence as bearer noteholders, are in no position to ensure things happen promptly. So rather than leaving it for all this nonsense with designating notices, it just kicks off automatically, allowing the various slaves, drones and pleasurebots that attend to an espievie’s every need, to go about unwinding the note.