General Conditions - 1992 ISDA Provision

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1992 ISDA Master Agreement
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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

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Section 2(a) in a Nutshell
Use at your own risk, campers!

2(a) General Conditions.

2(a)(i) Each party must perform its obligations under each Transaction Confirmation.
2(a)(ii) Parties must make:
(a) Payments for value the due date, as specified in the Confirmation, in freely transferable funds and in the regular fashion for making payments in the currency in question.
(b) Deliveries for receipt on the due date and in the regular fashion for making deliveries of the asset in question.
2(a)(iii) Each party’s obligations under each Transaction are conditional upon:
(1) there being no uncured Event of Default or Potential Event of Default against the other party.
(2) no Early Termination Date having been designated for the Transaction.
(3) each other condition precedent in this Agreement being met.

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Full text of Section 2(a)

2(a) General Conditions.

2(a)(i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.
2(a)(ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement.
2(a)(iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement.

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Related agreements and comparisons

Related Agreements
Click here for the text of Section 2(a) in the 2002 ISDA
Comparisons
Click to compare this section in the 1992 ISDA and 2002 ISDA.

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Content and comparisons

Section 2(a) is identical in the 1992 ISDA and the 2002 ISDA.
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Summary

Section 2 contains the basic nuts and bolts of your obligations under the Transactions you execute. Pay or deliver what you’ve promised to pay or deliver, when you’ve promised to pay it or deliver it, and all will be well.

And then there’s the mighty flawed asset provision of Section 2(a)(iii). This won’t trouble ISDA negotiators on the way into a swap trading relationship — few enough people understand it sufficiently well to argue about it — but if, as it surely will, the great day of judgement should visit upon the financial markets again some time in the future, expect plenty of tasty argument, between highly-paid Queen’s Counsel who have spent exactly none of their careers considering derivative contracts, about what it means.

We have some thoughts on that topic, should you be interested, at Section 2(a)(iii).
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General discussion

Flawed assets

Section 2(a)(iii): Of these provisions, the one that generates the most controversy (chiefly among academics and scholars, it must be said) is Section 2(a)(iii). It generates a lot less debate between negotiators, precisely because its legal effect is nuanced, so its terms are more or less inviolate. Thus, should your counterparty take a pen to Section 2(a)(iii), a clinching argument against that inclination is “just don’t go there, girlfriend”.

Payments and deliveries

In a rare case of leaving things to practitioners’ common sense, ISDA’s crack drafting squad™ deigned not to say what it meant by “payment” or “delivery”.

Payments

Payments are straightforward enough, we suppose — especially since they are stipulated to be made in “freely transferable funds and in the manner customary for payments in the required currency”: beyond that, money being money, you either pay or you don’t: there are not too many shades of meaning left for legal eagles to snuggle into.

Deliveries

Deliveries, though, open up more scope for confecting doubts one can then set about avoiding. what does it mean to deliver? What of assets in which another actor might have some claim, title or colour of interest? In financing documents you might expect at least a representation that “the delivering party beneficially owns and has absolute rights to deliver any required assets free from any competing interests other than customary liens and those arising under security documents”.

What better cue could there be for opposing combatants leap into their trenches, and thrash out this kind of language?

Less patient types — like yours truly — might wish to read all of that into the still, small voice of calm of the word “deliver” in the first place.

What else could it realistically mean, but to deliver outright, and free of competing claims? It is bound up with implications about what you are delivering, and whose the thing is that you are delivering. It would be absurd to suppose one could discharge a physical delivery obligation under a swap by “delivering” an item to which one had no title at all: it is surely implicit in the commercial rationale that one is transferring, outright, the value implicit in an asset and not just the formal husk of the asset itself, on terms that it may be whisked away at any moment at the whim of a bystander.

Swaps are exchanges in value, not pantomimes: one surrenders the value of the asset for whatever value one’s counterparty has agreed to provide in return. Delivery is not just some kind of performative exercise in virtue signalling. You have to give up what you got. As the bailiffs take leave of your counterparty with the asset you gave it strapped to their wagon, it would hardly do to say, “oh, well, I did deliver you that asset: it never said anywhere it had to be my asset, or that I was meant to be transferring any legal interest in it to you. It is all about my act of delivery, I handed something to you, and that is that.”

We think one could read that into the question of whether a delivery has been made at all. Should a third party assert title to or some claim over an asset delivered to you, your best tactic is not a vain appeal to representations your counterparty as to the terms of delivery, but to deny that it has “delivered” anything at all. “I was meant to have the asset. This chap has repossessed it; therefore I do not have it. If I don’t have it, it follows that you have failed to deliver it.”

Modern security as practical control

In any weather, nowadays much of this is made moot by the realities of how financial assets are transferred: that is, electronically, fungibly, in book-entry systems, and therefore, by definition, freely: a creditor takes security over accounts to which assets for the time being are credited, or by way of physical pledge where the surety resides in the pledgee holding and therefore controlling the securities for itself. It is presumed that, to come about, any transfer of assets naturally comes electronically and without strings attached. It would be difficult for such a security holder to mount a claim for an asset transferred electronically to a bona fide third party recipient for value and without notice: the practicalities of its security interest lie in its control over the asset in the first place: holding it, or at the least being entitled to stop a third party security trustee or escrow custodian delivering away the asset without the security holder’s prior consent.
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See also

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References