Hierarchy of Events - ISDA Provision
2002 ISDA Master Agreement
Section 5(c) in a Nutshell™
Full text of Section 5(c)
Related agreements and comparisons
Content and comparisons
A simple piddling match between Events of Default and Illegality in the 1992 ISDA makes way for a full-blown hierarchy of competing circumstances justifying closeout of the ISDA Master Agreement in the 2002 ISDA.
Why do we need this? Remember, an Event of Default is an apocalyptic disaster scenario which blows your whole agreement up with extreme prejudice; a Termination Event is just “one of those things” which justifies termination, but may relate only to a single Transaction, and even if it affects the whole portfolio, it isn’t something one needs necessarily to hang one’s head about. (It’s hardly your fault if they go and change the law on you, is it?)
A Force Majeure Event is something that is so beyond one’s control or expectation that it shouldn’t count as an Event of Default or even a Termination Event at all — at least until you’ve had a chance to sort yourself out, fashion a canoe paddle with a Swiss Army knife, jury-rig an aerial and get reconnected to the world wide web.
Note that the subordination of Events of Default to Illegality and Force Majeure in section 5(c)(i) specifically excludes a repudiatory Breach of Agreement as contemplated under the newly introduced section 5(a)(ii)(2), and any Credit Support Default other than a direct, non-repudiatory, default by the Credit Support Provider.
Why? Well, firstly, this is about Events of Default that are directly caused by an Illegality or Force Majeure, not simply ones which are coincidental with them. That being said, disciples of David Hume will appreciate that causal relations are not always perfectly clear, a spurious correlation can resemble causation, so there is inevitably scope for a mischievous defaulter to create confusion and angst here. Recognising this, ISDA’s crack drafting squad™ inserted some language which, in a world governed unstintingly by cold economic logic, would be redundant, but may help to put easily riled minds at rest here.
Secondly, if you have actually repudiated your contract — that is to say, point-blank refused to perform its clear terms — and, by lucky hap, your repudiation coincides with an Illegality or a Force Majeure by which you couldn’t perform it even if you wanted to, then your counterparty should not be obliged to give you the benefit of the doubt and have to close you out via the more genteel route of an Illegality Termination Event.
- It ought to go without saying that the Jolly Contrarian does not condone corporal punishment to wanton boys, although it never did him any harm.