Early Termination - ISDA Provision

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ISDA Anatomy

incorporating our exclusive ISDA in a Nutshell™

6 Early Termination

6(a) Right to Terminate following Event of Default

6(b) Right to Terminate following Termination Event

6(b)(i) Notice (of Termination Event)
6(b)(ii) Transfer to Avoid Termination Event
6(b)(iii) Two Affected Parties
6(b)(iv) Right to Terminate

6(c) Effect of Designation

6(d) Calculations

6(e) Payments on Early Termination

6(e)(i) Events of Default (Early Termination Payments)
6(e)(ii) Termination Events (Early Termination Payments)
6(e)(iii) Adjustment for Bankruptcy (Early Termination Payments)
6(e)(iv) Adjustment for Illegality or Force Majeure Event
6(e)(v) Pre-Estimate (Early Termination Payments)

6(f) Set Off

Resources Wikitext | Nutshell wikitext | 1992 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA | JC’s ISDA code project
Navigation Preamble | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
Events of Default: 5(a)(i) Failure to Pay or Deliver5(a)(ii) Breach of Agreement5(a)(iii) Credit Support Default5(a)(iv) Misrepresentation5(a)(v) Default Under Specified Transaction5(a)(vi) Cross Default5(a)(vii) Bankruptcy5(a)(viii) Merger without Assumption
Termination Events: 5(b)(i) Illegality5(b)(ii) Force Majeure Event5(b)(iii) Tax Event5(b)(iv) Tax Event Upon Merger5(b)(v) Credit Event Upon Merger5(b)(vi) Additional Termination Event

Index — Click ᐅ to expand:

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No general termination right under the ISDA Master Agreement
Unlike the 2010 GMSLA and many other — ahh, less sophisticated master agreements[1] — the ISDA Master Agreement doesn’t have a general termination right of this sort at all. It is like one of those fancy fixie pushbikes that cost seven grand and don’t even have brakes. You can only terminate Transactions, not the master agreement construct which sits around them. The empty vessel of a closed-out ISDA thus remains for all eternity as an immortal, ineffectual husk. This is to do with paranoid fears about the efficacy of the ISDA’s sainted close-out netting terms if you do terminate the agreement — meh; maybe — but I like to think it is because, before he was cast out from heaven, the Dark Lord[2] made plans to unleash his retributive fury upon the world through a sleeping army of wight-walker zombie ISDAs, doomed to roam the earth until the day of judgment, apropos nothing but there, not alive, but un-dead, ready to reanimate and rally to the Dark Lord’s banner and rain apocalyptic hell on we errant descendants of the Good Man, who did not heed His warnings of financial weapons of mass destruction.

How the Close-out mechanism Works

An Event of Default gives the Non-defaulting Party a right (but not an obligation) to designate an Early Termination Date with respect to all outstanding Transactions on not more than 20 days' notice.

  • Note that Automatic Early Termination removes that optionality in the event of a counterparty's insolvency and is, therefore, sub-optimal from the Non-defaulting Party's perspective, and thus should only be employed where the consequences of not having it would be worse (e.g. in jurisdictions where close-out netting may be challenged in an insolvency but not before). (That is to say, this is one provision you should not insist on just because the other party insists upon it against you).
  • For what this optionality not to terminate means, and how controversial it can be, see the commentary to Section 2(a)(iii).

Once all Transactions are terminated, you move to Section 6(e) which directs how to value the transactions (it depends on who is the Defaulting Party, and whether you have elected Loss or Market Quotation, and First Method or Second Method. Under the 2002 ISDA it is much easier.


  1. Yes; there is some inter-industry association bitterness and snobbery here.
  2. Sauron, Beelzebub, Nosferatu, Lehman Brothers etc.