1992 ISDA Master Agreement
A Jolly Contrarian owner’s manual
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Section 2(e) in a Nutshell™
Use at your own risk, campers!
Full text of Section 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
Click here for the text of Section 9(h) in the 2002 ISDA
It is really not worth even trying a comparison between Section 2(e) and Section 9(h) — trust me on this. What? You don’t trust me?
Oh, all right then:have it your way: Click to compare this section in the 1992 ISDA and 2002 ISDA. See?
Content and comparisons
This provision of the 1992 ISDA would be brought into line with the 2002 ISDA provision relating to Interest and Compensation under the current Protocol wording.
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.