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In a Nutshell™ Clause 7:
7 Termination
- 7(1) Material reason: For Transactions have not yet been fully settled, a party can only terminate the Agreement for a “material reason”. A material reason would include non-payment or non-performance for any reason, within five Banking Days of written notice of that non-performance by the non-defaulting party. Partial termination (e.g. of only some Transactions) i snot possible. Clause 12(5)(B) still applies.
- 7(2) Insolvency: The Agreement will terminate automatically if either party suffers an insolvency. “Insolvency” means the filing of an bankruptcy application or other insolvency proceedings against the assets of either party and such party either has filed the application itself or is generally unable to pay its debts as they become due or is in any other situation which justifies the commencement of such proceedings.
- 7(3) Obligations on Termination: The parties’ obligations under Clause 3(1) that due on or after the date of any such Termination will be cancelled and replaced by compensation claims under Clauses 8 and 9.
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DRV for Derivatives and Futures full text of Clause 7:
7 Termination
- 7(1) Where Transactions have been entered into and not yet fully settled, the Agreement can only be terminated by either party for material reason. Material reason includes circumstances where payment or other performance due has not been received, for whatever reason, by the party entitled thereto within five Banking Days after the party liable to pay or to perform has been notified of non-receipt of the payment or other non-performance. Such notification, as well as the notice of termination, must be in writing, either by telex, telegraph, facsimile or in any other similar form. A partial termination, in particular a termination of some, but not all Transactions, is excluded, Clause 12(5)(B) remains applicable.
- 7(2) The Agreement shall terminate, without notice, in the event of an insolvency. An insolvency shall be given, if an application is filed for the commencement of bankruptcy or other insolvency proceedings against the assets of either party and such party either has filed the application itself or is generally unable to pay its debts as they become due or is in any other situation which justifies the commencement of such proceedings.
- 7(3) In the event of termination upon notice by either party or upon insolvency (hereinafter called Termination), neither party shall be obliged to make any further payment or perform any other obligation under Clause 3(1) which would have become due on the same day or later; the relevant obligations shall be replaced by compensation claims in accordance with Clauses 8 and 9.
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Lots of fun things to see here.
Spartan close-out rights
Firstly, by comparison with the ISDA Master Agreement’s fecund battery of Events of Default, Termination Events and Additional Termination Events for closing out a delinquent counterparty, the DRV for Derivatives and Futures is positively Spartan: a failure to pay, or perform any part of the agreement, which requires notice to become an event of default, and insolvency, which doesn’t.
Insolvency
- Short and to the point: Continuing its theme of uncharacteristic Teutonic brevity, the idea of insolvency isn’t nearly as gruesomely articulated in the DRV for Derivatives and Futures as Bankruptcy is in the ISDA Master Agreement.
- Insolvency is automatic, but it isn’t an AET: Insolvency terminates the agreement instantly at the moment of — but not an instant before — insolvency. Given that the Germanic netting opinion writers tend to plump for the ISDA Master Agreement’s Automatic Early Termination — which contrives to terminate Transaction a micro-second before the insolvency commences, apparently to avoid theoretical weaknesses in a creditor’s position from the moment the insolvency happens — it is interesting that their own Banker’s trade association doesn’t feel exercised about the same issue in their domestic agreement. the agreement does terminate automatically, to be sure, but at, not before, the moment of insolvency. This gives innocent parties some risk, as almost certainly they will not know instantly that their transactions are over. They are theoretically unhedged for the period from the insolvency until they do.