Default Rate - 1987 ISDA Provision

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2002 ISDA Master Agreement

A Jolly Contrarian owner’s manual™

Default Rate in a Nutshell™

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Original text

“Default Rate” means 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 plus 1% per annum.

See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.
The Varieties of ISDA Experience
Subject 2002 (wikitext) 1992 (wikitext) 1987 (wikitext)
Preamble Pre Pre Pre
Interpretation 1 1 1
Obligns/Payment 2 2 2
Representations 3 3 3
Agreements 4 4 4
EODs & Term Events 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • FM • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM • ATE 5 Events of Default: FTPD • Breach • CSD • Misrep • DUSS • Cross Default • Bankruptcy • MWA Termination Events: Illegality • Tax Event • TEUM • CEUM
Early Termination 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations; Payment Date • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET • Set-off 6 Early Termination: ET right on EOD • ET right on TE • Effect of Designation • Calculations • Payments on ET
Transfer 7 7 7
Contractual Currency 8 8 8
Miscellaneous 9 9 9
Offices; Multibranch Parties 10 10 10
Expenses 11 11 11
Notices 12 12 12
Governing Law 13 13 13
Definitions 14 14 14
Schedule Schedule Schedule Schedule
Termination Provisions Part 1 Part 1 Part 1
Tax Representations Part 2 Part 2 Part 2
Documents for Delivery Part 3 Part 3 Part 3
Miscellaneous Part 4 Part 4 Part 4
Other Provisions Part 5 Part 5 Part 5

Resources and Navigation

Index: Click ᐅ to expand:
ISDA

Comparisons

No change between the 1992 ISDA and the 2002 ISDA. Or the 1987 ISDA. Got it, er, right first time.

Basics

Default interest is one of those perennial things in finance and is generally a rate higher than the implied funding rate for the period and person in question. You might well ask — though one might, as the JC does, struggle heroically to not go there — whether an arbitrary loading on what ought to be a fair estimate of one’s actual carrying cost is not an unenforceable penalty, but hey, everyone does it.

Since for a default period you are not lending at term or on a fixed rate, but rather on an overnight floating rate, the sudden extension of that period for an indefinite but which you are “lending” money does not cause you any unexpected funding costs that would not be built into your ordinary floating rate.

Why is there a Default Rate in the ISDA Master Agreement? Well, folks, it had me stumped. I managed to rustle up some flakey hypotheses in the premium section, only to know them down again, but for you cheapies I had a word to the chatbots. Even NiGEL our artificially artificial intell-i-gent, struggled to think of a rationale.

Would you say the higher default interest rate is more a market convention that persists despite not having a completely solid economic rationale?

If this is the kind of sensible question a neural network comes up with, the legal eagle’s place in the firmament is safe for some time yet.

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See also

References

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