|
2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
Resources and navigation
Section Applicable Deferral Rate in a Nutshell™
Use at your own risk, campers!
“ Applicable Deferral Rate” means:—
- (a) For Section 9(h)(i)(3)(A) [payments deferred under Section 2(a)(iii)], the market rate actually offered by a major bank in the interbank market for overnight deposits in that currency that the payer chose in good faith;
- (b) For Section 9(h)(i)(3)(B) [payments deferred during a Waiting Period because of an Illegality or Force Majeure] and clause (a)(iii) of Applicable Close-out Rate, the market rate actually offered by a major bank in the interbank market for overnight deposits in that currency that the payer chose in good faith and in consultation with the other party; and
- (c) For Section 9(h)(i)(3)(C) [payments not made after a Waiting Period expires while the Illegality or Force Majeure subsists] and clauses (a)(iv), (b)(i)(3) and (b)(ii)(l) of Applicable Close-out Rate, the average of the rate the payer obtains under (a) above and the annual rate of the payee’s cost of funding of that amount.
|
Full text of Section Applicable Deferral Rate
“ Applicable Deferral Rate” means:—
- (a) for the purpose of Section 9(h)(i)(3)(A), the rate certified by the relevant payer to be a rate offered to the payer by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by the payer for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market;
- (b) for purposes of Section 9(h)(i)(3)(B) and clause (a)(iii) of the definition of Applicable Close-out Rate, the rate certified by the relevant payer to be a rate offered to prime banks by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by the payer after consultation with the other party, if practicable, for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market; and
- (c) for purposes of Section 9(h)(i)(3)(C) and clauses (a)(iv), (b)(i)(3) and (b)(ii)(l) of the definition of Applicable Close-out Rate, a rate equal to the arithmetic mean of the rate determined pursuant to clause (a) above and a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount.
|
Related agreements and comparisons
|
Content and comparisons
This is all in the service of calculating interest at close out on payments that have been somehow deferred (under the Section 2(a)(iii) “flawed asset” provision, or because of Illegality or Force Majeure). It is, we think, an inordinate amount of verbal engineering to answer an uncontroversial question (viz., “what’s a fair interest rate to charge?”) in a deeply remote contingency.
ISDA’s crack drafting squad™. Never knowingly unfussed™.
Summary
If you want to find out the Applicable Close-out Rate, chances are you will bump into one of these deferred payments rates. Actually there are three Applicable Deferral Rates, depending on why a payment was deferred, and for how long it has been deferred.
- (a) If it is a 2(a)(iii) deferral, it is the actual rate the payer — being the one suspending the payment as a result of the other’s failure, of course — obtains in good faith in the inter-bank market.
- (b) If it is a deferral during a Force Majeure or Illegality waiting period, it’s that rate, only the payee gets to be consulted with about which bank it is. Yes, I know: — like, wow.
- (c) If the Waiting Period has expired but the Illegality or Force Majeure which is preventing the payment subsists, it is the average of the first such rate (that is, the one without consultation, so I suppose the payer can run off to a different bank, even though it consulted with the payee on the bank it used for the Waiting Period), but then it has to average that out against the payee’s cost of funding the amount it hasn’t received as a result of the suspension.
This might make sense as a piece of crystalline intellectual logic — so does an Yngwie Malmsteen guitar solo — but, practically, you have to wonder whether ISDA’s crack drafting squad™ hadn’t been hooking into the brandy a bit before knock-off time. I mean what on Earth were they thinking?
See also
References
I’m sorry I asked