Events of Default - 1992 ISDA Provision

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1992 ISDA Master Agreement
A Jolly Contrarian owner’s manual

Section 5(a) in a Nutshell
Use at your own risk, campers!

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Section 5(a) in full

5(a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an “Event of Default”) with respect to such party:—

5(a)(i) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party;
5(a)(ii) Breach of Agreement. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) or to give notice of a Termination Event or any agreement or obligation under Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party;
5(a)(iii) Credit Support Default.
(1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed;
(2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or
(3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document;
5(a)(iv) Misrepresentation. A representation (other than a representation under Section 3(e) or 3(f)) made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated;
5(a)(v) Default under Specified Transaction. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party
(1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction,
(2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or
(3) disaffirms, disclaims, repudiates or rejects, in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf);
5(a)(vi) Cross Default. If “Cross Default” is specified in the Schedule as applying to the party, the occurrence or existence of
(1) a default, event of default or other similar condition or event however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or
(2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period);
5(a)(vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party: —
(1) is dissolved (other than pursuant to a consolidation, amalgamation or merger);
(2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due;
(3) makes a general assignment, arrangement or composition with or for the benefit of its creditors;
(4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition
(A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or
(B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof;
(5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger);
(6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets;
(7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter;
(8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or
(9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or
5(a)(viii) Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer: —
5(a)(viii)(1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or
5(a)(viii)(2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement.

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Related agreements and comparisons

Related Agreements
Click here for the text of Section 5(a) in the 2002 ISDA
Comparisons
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Resources and navigation

Resources Wikitext | Nutshell wikitext | 2002 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA
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) Tax Event5(b)(iii) Tax Event Upon Merger5(b)(iv) Credit Event Upon Merger5(b)(v) Additional Termination Event

Index — Click ᐅ to expand:

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Content and comparisons

5(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

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Summary

Types of Events of Default

Independently verifiable

Some Events of Default you can independently verify without counterparty's confirmation, for example:

Not independently verifiable

Some require the counterparty to tell you as they depend on facts which you could not know are not public knowledge, are not breaches of a direct obligation to the counterparty and would not otherwise come to the firm's attention: Particularly:

  • Cross Default
  • other limbs of Bankruptcy (eg "has a secured party take possession of all or substantially all its assets".
“Hard” Events of Default

Hard events where some positive action has actually been taken representing a default - such as a Failure to Pay

“Soft” or “Passive” Events of Default

Where a state of affairs has arisen permitting a hard Event of Default to be called, but it has not been designated it happened, such as Cross Default, where person owning the actual "hard" default right against your counterparty may not have triggered (or have any intention of triggering) it.

That said, and for the same reason, such “not independently verifiable” termination/default events are effectively soft anyway, even where we have such an obligation from counterparty to notify us of their occurrence, because we have no means of policing whether or not the Counterparty has in fact notified us, and therefore no practical remedy anyway if it does not. It is a self certification, after all, and all we can rely on is its moral force and the party's competence to monitor its own position and be sufficiently organised to tell us.

Additionally, the obligation on a counterparty to monitor "passive" Events of Default like Cross Default (as opposed to cross acceleration where QED a defaulting party will be notified about the occurrence) is a pretty onerous one particularly for a large entity, and even more so where (as they often are for funds) derivatives are included in definition of Specified Indebtedness.

Given that cross defaults may have artificially low Threshold Amounts (as do some of ours) and are set at levels where actual counterparties owning those rights directly are most unlikely to exercise them, it should not be a surprise to find parties resistant to notifying us about these.

This becomes a credit call but a practical recommendation would be:

  1. Impose notification requirement only on "active" termination/default events which are non-public and CP has no excuse for not having monitored them and counterparty has actually exercised; and
  2. If that doesn't work, agree to drop the provision altogether, as in my view its practical utility is limited to "moral" at best (as there is no effective sanction for counterparty breach anyway)

Illegality

Illegality trumps Event of Default. Be careful where, for example, a Failure to Pay is occasioned by a mandatory change in law by a government having jurisdiction over one or other counterparty — see Illegality. Good example: Greek capital controls of June 2015.
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General discussion

Events of Default vs. Termination Events: Showdown

Puzzled ISDA ingénues[1] may wonder why there are Events of Default and Termination Events under the, er, eye-ess-dee-aye. In any weather, there seem to be rather a lot of them. And there is a third, hidden category: Additional Termination Events that the parties crowbar into the Schedule.

Do we really need all these,[2] and what is the difference?

So, with feeling:

Events of Default...

Termination Events ...

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See also

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References

  1. The sorts of people who are interested in learning about sw-æps under an eye-ess-dee-aye. Come on, you were one once.
  2. Controversial view: No, except to protect the livelihoods of an entire cottage industry of sheeple.
  3. You will never guess who.
  4. Please write to me, at youwerewrongyoudolt@jollycontrarian.com, if you ever encounter a close-out — a real, actually-gone-through-with-it, Section 6, whole-ISDA close out based purely on an Additional Termination Event (or, actually, any event other than a Failure to Pay or Deliver or a Bankruptcy) You will be my Black Swan.
  5. I mean the Defaulting Party.
  6. Though this won’t stop excitable credit officers seeking to add that obligation in the negotiation.
  7. by no means clear: has ever anyone seen a live example of a credit event upon merger?