Events of Default - ISDA Provision

A comparison between the 1992 ISDA and the 2002 ISDA can be found on the ISDA Comparison page.

Section 5(a) of the 2002 ISDA Master

(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 (subject to Sections 5(c)
and 6(e)(iv)) an event of default (an “Event of Default”) with respect to such party:―

Section 5, ISDA Master Agreement

(a) Events of Default

(i) Failure to Pay or Deliver

(ii) Breach of Agreement

(iii) Credit Support Default

(iv) Misrepresentation

(v) Default under Specified Transaction

(vi) Cross Default

(vii) Bankruptcy

(viii) Merger without Assumption

(b) Termination Events

(i) Illegality

(ii) Tax Event

(iii) Tax Event Upon Merger

(iv) Credit Event Upon Merger

(v) Additional Termination Event

(c) Event of Default and Illegality

Additional Events of Default

Note that additional events of default may be set out in Part 5 of the ISDA Schedule.

Termination Events and Events of Default

Termination Events and Events of Default under an ISDA Master Agreement are similar in that when they occur to one party (the Affected Party or Defaulting Party) the other may terminate outstanding trades under the agreement. Differences:

• Events of Default: As the word "default" implies EODs are treated as the fault the defaulting party and may give rise to third-party default rights (where the relevant Cross Default extends to derivatives and trading documents);
• Termination Events: There is less "moral turpitude" associated with a Termination Event under an ISDA Master Agreement, and they will generally not trigger Cross Defaults (not amounting to "defaults".

Types of Events of Default

Events of Default can be categorised:

• Independently Verifiable: Some by their nature can independently verified without affirmation from the Counterparty particularly:
  • Direct Breaches: direct breaches of the Agreement (eg Failure To Pay; Breach of Agreement);
  • Public Actions: Events which are necessarily public (most of the Bankruptcy limbs; Merger Without Assumption
• Not independently verifiable: Others require acknowledgement or notice from the counterparty as they may depend on states of affairs which are not public knowledge, are not breaches of a direct obligation to BBPLC 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 come about, but one has not necessarily happened, such as Cross Default, where the third party owning the actual "Hard" Default right may not have triggered it (and may have no 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 GFRM 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)

• Soft Events of Default