Applicable Close-out Rate - ISDA Provision

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2002 ISDA Master Agreement
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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

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Section Applicable Close-out Rate in a Nutshell
Use at your own risk, campers!

Applicable Close-out Rate” means:—

(a) on an Unpaid Amount:—
(i) if the Defaulting Party’s obligation, the Default Rate;
(ii) if the Non-defaulting Party’s obligation, the Non-default Rate;
(iii) if a deferred obligation under Section 5(d), if there is no Defaulting Party during the deferral period, the Applicable Deferral Rate; and
(iv) in any other case following a Termination Event (except interest which accrues under (iii) above), the Applicable Deferral Rate; and
(b) on an Early Termination Amount:—
(i) from the Early Termination Date until the Early Termination Amount is payable:—
(1) if payable by a Defaulting Party, the Default Rate;
(2) if payable by a Non-defaulting Party, the Non-default Rate; and
(3) in all other cases, the Applicable Deferral Rate; and
(ii) from the date the Early Termination Amount is payable until it is actually paid:—
(1) if unpaid because of an Illegality or Force Majeure Event the Applicable Deferral Rate;
(2) if payable by a Defaulting Party (excluding any period where (1) above applies), the Default Rate;
(3) if payable by a Non-defaulting Party (excluding any period where (1) above applies), the Non-default Rate; and
(4) in all other cases, the Termination Rate.

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Full text of Section Applicable Close-out Rate

Applicable Close-out Rate” means:—

(a) in respect of the determination of an Unpaid Amount:—
(i) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate;
(ii) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate;
(iii) in respect of obligations deferred pursuant to Section 5(d), if there is no Defaulting Party and for so long as the deferral period continues, the Applicable Deferral Rate; and
(iv) in all other cases following the occurrence of a Termination Event (except where interest accrues pursuant to clause (iii) above), the Applicable Deferral Rate; and
(b) in respect of an Early Termination Amount:—
(i) for the period from (and including) the relevant Early Termination Date to (but excluding) the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable:—
(1) if the Early Termination Amount is payable by a Defaulting Party, the Default Rate;
(2) if the Early Termination Amount is payable by a Non-defaulting Party, the Non-default Rate; and
(3) in all other cases, the Applicable Deferral Rate; and
(ii) for the period from (and including) the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable to (but excluding) the date of actual payment:—
(1) if a party fails to pay the Early Termination Amount due to the occurrence of an event or circumstance which would, if it occurred with respect to a payment or delivery under a Transaction, constitute or give rise to an Illegality or a Force Majeure Event, and for so long as the Early Termination Amount remains unpaid due to the continuing existence of such event or circumstance, the Applicable Deferral Rate;
(2) if the Early Termination Amount is payable by a Defaulting Party (but excluding any period in respect of which clause (1) above applies), the Default Rate;
(3) if the Early Termination Amount is payable by a Non-defaulting Party (but excluding any period in respect of which clause (1) above applies), the Non-default Rate; and
(4) in all other cases, the Termination Rate.

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Related agreements and comparisons

Related Agreements
Click here for the text of Section [[- 1992 ISDA Provision|]] in the 1992 ISDA
Comparisons
Click to [[special:diff/{{{1}}}/{{{2}}}|compare]] this section in the 1992 ISDA and 2002 ISDA.

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Content and comparisons

No equivalent under the 1992 ISDA.
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Summary

Truly from the I’m sorry I asked file — almost in the shoot me file. This whole game of pan-dimensional chess, with six different rates to apply in different circumstances, is all just to work out how to accrue interest on Unpaid Amounts and Early Termination Amounts when closing out. You get a strong sense that the pragmatists of ISDA’s crack drafting squad™ — if there are any — had well and truly tuned out and gone to the bar by the the ’squad got to this definition. Looking on the bright side, at least it doesn’t mention LIBOR.[1]

You have the Default Rate, the Non-default Rate, the Applicable Deferral Rate, and the Termination Rate. Depending on how and why you have closed out the 2002 ISDA, and whether you were at fault, a different rate will apply.

The four rates are:

All sensible enough, if not a little over-determined — and then the threeApplicable Deferral Rates”, which convert this from something that is merely tedious to the stuff of a Hieronymus Bosch nightmare.
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See also

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References

  1. Dramatic Chipmunk.png
    Did someone say LIBOR?