Additional Termination Event - 1992 ISDA Provision
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”.
- The JC’s famous Nutshell™ summary of this clause
- From the “tricks for young playas” file: why there is no section 5(b)(vi), and why you should not make one.