Failure to Pay or Deliver - ISDA Provision
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2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™ 5(a)(i) in all its glory
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Overview
The significant change between 1992 ISDA and 2002 ISDA is the restriction of that grace period from three Local Business Days to one. And a bit of convolutional frippery in introducing Local Delivery Days as well.
Compare also Failure to Pay under the 2014 ISDA Credit Derivatives Definitions, which is subtly different given the different purpose that it plays under a CDS.
Summary
Failure to Pay under Section 5(a)(i) of the ISDA Master Agreement: where a party fails to pay or deliver on time and does not remedy before the grace period expires. The grace period for a 2002 ISDA is one Local Business Day; shorter than the three Local Business Days in the 1992 ISDA. This fact alone has kept a number of market counterparties on the 1992 form, nearly thirty years after it was upgraded.
CSAs
There’s a technical funny due to the American habit of insisting on a pledge-only 1994 New York law CSA and then designating it as a Credit Support Document (against the hopes and dreams of ISDA’s crack drafting squad™ when it drafted the Users’ Guide, but still), and that is a failure to pay under an English law CSA is a Section 5(a)(i) Failure to Pay or Deliver, whereas a failure to pay under a New York Law CSA is a Section 5(a)(iii) Credit Support Default. Doth any difference it maketh? None, so far as we can see.
Funny old world we live in.
Payments satisfied other ways
One from the tricks for young players department.
Say you have some awkward client who insists on a right to meet a credit support payments some other way? For example, by terminating other in-the-money Transactions, in lieu of ponying up cold, hard, folding spondoolies. Does this convert a hardcore payment obligation into something more vapid, vague and fluffy? Something that the failure to effectively carry out doesn’t quite qualify as a Failure to Pay or Deliver?
“Look, I know I didn’t meet my variation margin, but, Sir, your honour, I didn’t have to actually pay it. I was allowed to terminate something else in lieu. So while I could have sorted this all out with a payment — and I think we can all agree that might have been the most sensible thing to do — and I was obliged to sort this out somehow, I wasn’t obliged to sort it out with a payment. Sir. Your honour.”
Why might this matter? Isn’t it an Event of Default either way? What difference does it make whether it was a Breach of Agreement or a Failure to Pay or Deliver?
I can already see hands shooting up from the ISDA ninjas in the front row. And yes, my little tricoteuses, you are right. Grace periods. That is the difference. A Failure to Pay or Deliver has a grace period of one day.[1] A Breach of Agreement has a thirty day grace period. Even the hyenas will have given up and gone home by then.
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- The JC’s famous Nutshell™ summary of this clause
- Comparison of the ISDA Master Agreement’s Failure to Pay or Deliver with the Failure to Pay in the 2014 ISDA Credit Derivatives Definitions
See also
- Failure to pay generally
- Events of default generally