2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
Applicable Deferral Rate in a Nutshell™
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Applicable Deferral Rate in all its glory
“Applicable Deferral Rate
- (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.
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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™.
If you want to find out the Applicable Close-out Rate, chances are you will bump into one of these deferred payments rates. You might think, and we might agree with you, that ISDA’s crack drafting squad™ was over-thinking a remote contingency for recovering more money from a counterparty that probably doesn’t have the money to pay it in the first place. Okay, okay, it might do upon a Force Majeure Event or an Illegality. But not a 2(a)(iii) suspension.
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- The JC’s famous Nutshell™ summary of this clause
- Analysis of the three different Applicable Deferral Rates, and why the JC thinks you (and ISDA’s crack drafting squad™) would have been much better just sticking with a published base rate and not bothering with all this fusspot engineering.