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| {{fullanat2|isda|2(a)|1992|2(a)|2002}} | | {{newisdamanual|2(a)}} |
| ===Commentary===
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| ''See also a wider discussion of proposed changes at {{isdaprov|Section 2(a)(iii)}}''
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| The provisions are the same in both versions of the {{isdama}}
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| ====Section 2(a)(iii)====
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| Section 2(a)(iii) of the {{isdama}} was considered in the [[Metavante]] litigation, which has led to more or less the opposite conclusion to the court in [[Enron v TXU]].
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| The following is a proposal to "fix" the issues perceived to arise from the [[Metavante]] and, more specifically, the [[Marine Trade]] case with respect to section 2(a)(iii), about which HMT Treasury is sufficiently concerned so as to establish a consultation group to advise it on the ISDA Master Agreement.
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| Mean time, [[ISDA]] is looking to propose a market led solution. That is HMT's preferred position but they may well legislate if a workable solution is not forthcoming.
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| HMT has not concluded that 2(a)(iii) necessarily operates as a walk-away clause (or "ipso facto" clause as it is called in the US) but is concerned it may have that economic effect and is is raising policy arguments as to why that should not be allowed to continue.
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| Clearly, any push towards a finding of "walk-aways" takes derivative counterparties to an unsupportable place with regard to RWA generation under the [[Capital Accords]].
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| ====See Also====
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| *[[Case Note - Section (2)(a)(iii) - Reed Smith]]
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| ===HMT concerns===
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| The key concern for HMT relates to non-payment into the insolvent estate by the insolvent company's debtors. Specifically:
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| 1. '''Time delay''' - how long can parties rely on 2(a)(iii) for? Indefinitely?
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| 2. '''Opportunism''': Can a non-defaulting party effectively monetise the gross obligations of a defaulting party by not designating an {{isdaprov|Early Termination Date}} and then realising value through the exercise of {{isdaprov|Set-off}} rights or the enforcement of security?
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| 3. Faux J indicated in his judgment that the obligations of the non-defaulting party under the [[ISDA]] never come into existence if the condition precedent is not satisfied on the relevant payment date: i.e., the failure cannot be cured and the obligations cannot come into existence on a future date if the CP is subsequently satisfied. That view is controversial and was expressed obiter dicta. The CA may not address it for that latter reason.
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| *[http://ftalphaville.ft.com/blog/2009/09/30/74606/lehman-metavante-and-the-isda-master-agreement/ Lehman, Metavante and the ISDA Master Agreement - FT Alphaville]
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| *[[Metavante]]
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| {{c1|Insolvency}}
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Latest revision as of 12:44, 30 December 2023
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2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
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The JC’s Nutshell™ summary of this term has moved uptown to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get it here. Sign up at Substack.
| ISDA Text: 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
Resources and Navigation
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Overview
The 1987 ISDA, being concerned only with interest rates and currency exchange, does not contemplate delivery, as such. Delivery implies non-cash assets. Therefore portions of 2(a)(i) and 2(a)(ii) were augmented in the 1992 ISDA to cater for this contingency. The 1992 ISDA also added a condition precedent to the flawed asset clause (Section 2(a)(iii)) that no Early Termination Date had been designated.
Thereafter Section 2(a) is identical in the 1992 ISDA and the 2002 ISDA. However the subsidiary definition of Scheduled Settlement Date — a date in which any Section 2(a)(i) obligations fall due — is a new and frankly uncalled-for innovation in the 2002 ISDA.
We have a special page dedicated to Section 2(a)(iii), by the way. That is a brute, and one of the most litigationey parts of the Agreement.
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.
“Scheduled Settlement Date”
Though it doesn’t say so, at least in the 2002 ISDA the date on which you are obliged to pay or deliver an amount is the “Scheduled Settlement Date”. The ’02 definition only shows up only in Section 2(b) (relating to the time by which you must have notified any change of account details) and then, later, in the tax-related Termination Events (Tax Event and Tax Event Upon Merger). That said, “Scheduled Settlement Date” isn’t defined at all in the 1992 ISDA.
Section 2(a)(iii): the flawed asset provision
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 judgment should visit upon the financial markets again some time in the future, expect plenty of tasty argument, between highly-paid King’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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- The JC’s famous Nutshell™ summary of this clause
- “Flawed Assets” generally
- What is meant by “payments” and “deliveries”, related conceptual matters, especially as regards “delivery”
- Modern electronic clearance as a practical control
See also
References