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| Automatic Early Termination is a concept which exists in Section {{isdaprov|6(a)}} {{isdaprov|Right to Terminate Following Event of Default}} of the {{isdama}}. it is relevant to [[Netting]]. Click here for the [http://sharepoint/sites/legal/Shared%20Library/Netting.aspx Jurisdictional Netting Matrix], should that seem like a useful place to go.
| | {{nman|isda|2002|Automatic Early Termination}} |
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| ===AET under the {{1987ma}}===
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| Note the somewhat difficult position for AET under the {{1987ma}} - a fuller discussion at that article - which was part of the reason for the move to the {{1992ma}} uin the first place.
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| {{isdasnap|6(a)}}
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| ==Analysis==
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| Note that {{isdaprov|AET}} is only triggered by certain events under the {{isdaprov|Bankruptcy}} [[Events of Default - ISDA Provision|event of default]], and isn't triggered by {{isdaprov|Cross Default}} for example.
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| ==Discussion==
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| ===AET Generally===
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| Automatic Early Termination is only useful where the {{isdaprov|Defaulting Party}} is based in a jurisdiction which prevents or jeopardises a {{isdaprov|Non-Defaulting Party}};s ability to close out {{isdaprov|Transaction}}s where a Defaulting Party has become [[insolvent]]. AET addresses the potential for a liquidator in such a jurisdiction to "cherry pick" those transactions it wishes to honour (namely, those in the money to the Defaulting Party) and which of those it will avoid (those where the Defaulting Party is out of the money. Such cherry-picking completely destroys the concept of [[Close-out Netting]], of course. | |
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| *Under the {{isdama}} a Non-defaulting Party has a right (but not an obligation) to designate an {{isdaprov|Early Termination Date}} upon the occurrence of an {{isdaprov|Event of Default}} - cue a lengthy discussion on [[Metavante]] and [[Section 2(a)(iii)]].
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| *However, where AET applies against a counterparty an Early Termination Date is deemed to have taken place ''immediately prior'' to an insolvency event with respect to that party, without the need for any action by the Non-Defaulting Party.
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| *This isn't an unequivocally good thing for a {{isdaprov|Non-defaulting Party}}, particularly where:
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| :*its net position is out of the money to the {{isdaprov|Defaulting Party}}.
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| :*it is not be aware of the insolvency event (because by the time it does learn of it, and gets round to terminating its hedges, the markets have moved, leaving a [[MTM]] gap between the termination value of the Transactions and the termination value of the hedges).
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| ===Should we allow AET versus BBPLC?===
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| AET is predominantly useful in jurisdictions which recognise zero-hour rules in their insolvency regimes. England is not one of those jursidictions. Playing devil's advocate I can only think of two reasons why a party might historically want to apply AET to an English company:
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| #to avoid the risk of a winding up order being made in respect of the bank in circumstances where the non-defaulting cpty was unaware of the event (not a likely scenario in the case of {{Bank}} - not least because of the public nature of the exercise of tri-partite powers under the [[Banking Act]]) and therefore had not terminated the agreement - where that happens the determination of the [[present value]] of future cashflows follows a formula prescribed in the insolvency regs rather than being determined across the part of the relevant depo curve rate which a trading desk might otherwise apply under section 6, (and obligations are required to be set off as of the date of the winding up order) and
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| #historic sensitivity around the availability of [[set-off]] rights in respect of contingent debt obligations (such as fully paid options) owed to the defaulting party - the argument being that the exercise of rights under s.6 removes the contingency - this latter concern was relieved by a case before the House of Lords in 2004 and a subsequent change to the Insolvency rules in 2005 so should be redundant.
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| Beyond that I doubt it is helpful to include. If the ETD falls on a Monday because of the AET but cpty does not price up its books until e.g., the Friday (because it was not aware of the trigger), then the cpty could be expected to be challenged by our liquidators as to the timing of the close out and the basis of obtaining prices. That issue was looked at in the [[High Risk v Credit Lyonnais]] litigation and was also discussed in the [[Peregine v JP Morgan]] litigation in New York in 2005.
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| Overall, arguments for applying AET seem weak, and potentially put the {{isdaprov|Non-deafulting Party}} in a worse position than they would otherwise be in as it necessitates termination on our insolvency even where they’re out of the money, which (per [[Section 2(a)(iii)]] and equivalents) they wouldn’t necessarily need - or want- to do otherwise (i.e. where it would lead to a capital *inflow* to {{Bank}}).
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| {{isdaanatomy}}
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| *{{isdaprov|Right to Terminate Following Event of Default}}
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