Default Interest; Other Amounts - 1992 ISDA Provision

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1992 ISDA Master Agreement

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ISDA Text: 2(e)

2(e) Default Interest; Other Amounts. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement.

Related agreements and comparisons

Related Agreements
Click here for the text of Section 2(e) in the 2002 ISDA
It is hardly worth trying a comparison between Section 2(e) and Section 9(h) but you can in any case compare them here.

Resources and Navigation

Resources Wikitext | Nutshell wikitext | 2002 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA

Navigation Preamble | 1(a) (b) (c) | 2(a) (b) (c) (d) (e) | 3(a) (b) (c) (d) (e) (f) | 4(a) (b) (c) (d) (e) | 55(a) Events of Default: 5(a)(i) Failure to Pay or Deliver 5(a)(ii) Breach of Agreement 5(a)(iii) Credit Support Default 5(a)(iv) Misrepresentation 5(a)(v) Default Under Specified Transaction 5(a)(vi) Cross Default 5(a)(vii) Bankruptcy 5(a)(viii) Merger Without Assumption 5(b) Termination Events: 5(b)(i) Illegality 5(b)(ii) Tax Event 5(b)(iii) Tax Event Upon Merger 5(b)(iv) Credit Event Upon Merger 5(b)(v) Additional Termination Event (c) | 6(a) (b) (c) (d) (e) | 7 | 8(a) (b) (c) (d) | 9(a) (b) (c) (d) (e) (f) (g) | 10 | 11 | 12(a) (b) | 13(a) (b) (c) (d) | 14 |

Index: Click to expand:



Section 2(e), dealing with default interest, was removed in the 2002 ISDA, and replaced with a spikier, more fulsome Section 9(h) (Interest and Compensation).

A new and different Section 2(e) for the 2002 ISDA was almost revived after the global financial crisis as a tool for imposing a “use it or lose it” trigger on Section 2(a)(iii), but the moment passed. See Condition End Date for more information.



Section 2(e) covers that netherworld between when a party defaults on its obligations under a Transaction and when (and if)the other, innocent, party closes that Transaction out.

Now, you might think this would of necessity be a short period — if the other guy is in default I am hardly going to sit around and do nothing, am I? — but a swap transaction isn’t like a normal lending transaction, the innocent party might be significantly out of the money on the Transaction, and therefore quite happy to to do nothing, particularly since, as long as the default is continuing, Section 2(a)(iii) suspends that party’s own payment and delivery obligations under the Transaction indefinitely.

Note the difference between a defaulted payment obligation and a defaulted delivery obligation: payments have a fairly anal penalty interest accrual regime; deliveries are left up to the parties to agree for themselves in the Schedule. This, in the JC’s unsolicited opinion, is a bit wet on ISDA’s part: a delivery obligation (usually of a tradable security or commodity) clearly has an observable market value as of its due delivery date. It is hard to see why interest could not accrue on that notional value. But anyway.

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See also