Calculations - ISDA Provision

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2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual

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Resources Wikitext | Nutshell wikitext | 1992 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA | JC’s ISDA code project
Navigation Preamble | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
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 6(d) in a Nutshell
Use at your own risk, campers!

6(d) Calculations; Payment Date.

(i) Statement. As soon as practicable following an Early Termination Date, each party will calculate its Section 6(e) amount and give the other party a statement:
(1) showing reasonable detail of its calculations;
(2) specifying any Early Termination Amount payable; and
(3) giving its bank details for payment of the Early Termination Amount.
Its records of any quotation or market data it uses will be conclusive of their accuracy.
(ii) Payment Date. An Early Termination Amount due in respect of any Early Termination Date will, together with any applicable interest, be payable
(1) on the day its Section 6(d) statement is effective (if the Early Termination Date follows an Event of Default) and
(2) two Local Business Days after the day its Section 6(d) statement is effective (or, where there were two Affected Parties, after the second statement is effective) (where the Early Termination Date follows a Termination Event.

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Full text of Section 6(d)

6(d) Calculations; Payment Date.

(i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement
(1) showing, in reasonable detail, such calculations (including any quotations, market data or information from internal sources used in making such calculations),
(2) specifying (except where there are two Affected Parties) any Early Termination Amount payable and
(3) giving details of the relevant account to which any amount payable to it is to be paid.
In the absence of written confirmation from the source of a quotation or market data obtained in determining a Close-out Amount, the records of the party obtaining such quotation or market data will be conclusive evidence of the existence and accuracy of such quotation or market data.
(ii) Payment Date. An Early Termination Amount due in respect of any Early Termination Date will, together with any amount of interest payable pursuant to Section 9(h)(ii)(2), be payable
(1) on the day on which notice of the amount payable is effective in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default and
(2) on the day which is two Local Business Days after the day on which notice of the amount payable is effective (or, if there are two Affected Parties, after the day on which the statement provided pursuant to clause (i) above by the second party to provide such a statement is effective) in the case of an Early Termination Date which is designated as a result of a Termination Event.

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Related agreements and comparisons

Related Agreements
Click here for the text of Section 6(d) in the 1992 ISDA
Comparisons
Template:Isdadiff 6(d)

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Content and comparisons

Comparison: Here is a comparison between the 1992 and 2002 versions.

Previous: 6(a) | 6(b) | 6(c) Next: 6(e)
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Summary

Section 6(d) is to do with working out the termination value of Transactions for which you’ve just designated an Early Termination Date: in the 1992 ISDA using Loss and Market Quotation, and all that Second Method malarkey, and in the 2002 ISDA the much neater and tidier Close-out Amount concept.

Generally, this is good fat-tail paranoia material, so once upon a time parties used to negotiate it heavily. General SME-drain from the negotiation talent pool over the years due to vigorous down-skilling means people are less fussed about it now.

A popular parlour game among those pedants who still insist on using the 1992 ISDA[1] is to laboriously upgrade every inconsistent provision in the 1992 ISDA to the 2002 ISDA standard except the one provision of the 1992 ISDA they always liked — if the pedant is in question is from the Treasury department, that will be the longer grace period in the Failure to Pay; if she is from Credit, it absolutely won’t be.

You might well ask why anyone would be so bloody-minded, but then you might well ask why anybody watches films from the Fast and Furious franchise. Because they can.

Or, possibly, to preserve the slightly more generous grace periods for Failure to Pay[2] and Bankruptcy[3] (in which case, you’d retrofit longer grace periods into the new version, wouldn’t you? But no).
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General discussion

Section 6(d) gives the ISDA ninja a bit of a chicken-and-egg situation on close-out as, having served your Section 6(a) notice designating a point in the near future as the Early Termination Date, you must now ascertain termination values for the Terminated Transactions as of that date, before that date, but you can’t really work out their mark-to-market values at any time before that date, not being able to see into the future or anything.[4]

Anyway, that’s a conundrum for your trading people (and in-house metaphysicians) to deal with and it need not trouble we eagles of the law. For our purposes, the trading and risk people need to come up with Close-out Amounts[5] for all outstanding Transactions. Once they have done that you are ready for your Section 6(e) notice.
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See also

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References

  1. Or, in fairness, are forced to by some other pedant further up their chain, or a general institutional disposition towards pedantry.
  2. Three days in the 1992 ISDA versus one in the 2002 ISDA.
  3. Thirty days in the 1992 ISDA versus 15 in the 2002 ISDA.
  4. Apologies if we are underestimating your faculties here by the way. But if you are clairvoyant, why did you trade with this counterparty in the first place? Huh?
  5. Or un-labelled equivalent for 1992 ISDAs.