ISDA Comparison: Difference between revisions

The {{2002ma}}, with its {{isdaprov|Close-Out Amount}}, is way simpler than the {{1992ma}} which gets bogged down with all this {{isdaprov|Loss}}, {{isdaprov|Market Quotation}}, {{isdaprov|First Method}}, {{isdaprov|Second Method}} malarkey.

#if an occurrence would constitute an {{isdaprov|Illegality}} '''''or''''' {{isdaprov|Force Majeure}} '''''and''''' an {{isdaprov|Event of Default}} under {{isdaprov|Section 5(a)(i)}}, {{isdaprov|Section 5(a)(ii)}}(1), or {{isdaprov|5(a)(iii)}}(1), it will be treated as an {{isdaprov|Illegality}} or {{isdaprov|Force Majeure}}  so long as the occurrence relates to a failure to make any payment or delivery, failure to comply with a material term of the Agreement, or a failure to comply with a material provision of the {{2002isda}} or any {{isdaprov|Credit Support Document}} ; and  

===={{isdaprov|Events of Default}} ====

*'''Cure Periods''': Some of the cure periods were reduced out of the concern that these cure periods create undue risk when market volatility increases in times of turmoil in the financial markets. This was addressed in the {{2002isda}} by reducing the cure periods:

*'''{{isdaprov|Breach of Agreement}}''': An additional subsection has been added to the {{isdaprov|Breach of Agreement}} {{isdaprov|Event of Default}} (Section {{isdaprov|5(a)(ii)}} that establishes an {{isdaprov|Event of Default}} when “the party disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, this Master Agreement, any {{isdaprov|Confirmation}} executed and delivered by that party or any {{isdaprov|Transaction}} evidenced by such a {{isdaprov|Confirmation}} (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf).” Although this additional subsection is part of Section {{isdaprov|5(a)(ii)}}, the 30 day cure period applies only to Section {{isdaprov|5(a)(ii)}}(1) and not to the new subparagraph (2). This new {{isdaprov|Event of Default}} is similar to the {{isdaprov|Credit Support Default}} {{isdaprov|Event of Default}} in Section {{isdaprov|5(a)(iii)}}(3) of the {{1992isda}}, which was also included in the {{2002isda}}.  

*'''{{isdaprov|Default under Specified Transaction}}''': This {{isdaprov|Event of Default}} was expanded in five significant ways:

#Delivery and other general defaults require the liquidation or early termination of the {{isdaprov|Specified Transaction}} (for general defaults) or the liquidation or early termination of all outstanding {{isdaprov|Transaction}}s under the documentation supporting the {{isdaprov|Specified Transaction}} (for a delivery default). This change was made with [[repo]]s and [[stock loan]]s in mind because a failure under a repo is not uncommon and may not be indicative of the {{isdaprov|Defaulting Party}}’s creditworthiness, particularly when the default concerns delivery obligations.

#The [[repudiation]] subsection was modified in two significant ways:  (i) the phrase “or challenges the validity of” was added after “disaffirms, disclaims, repudiates or rejects” to reduce ambiguity as to whether a party’s action constitutes a repudiation; and (ii) a Non-{{isdaprov|Defaulting Party}} is now required to possess evidence of such repudiation that is executed and delivered by the {{isdaprov|Defaulting Party}}, its Credit Support Provider, or a Specified Entity; (iii) The definition of {{isdaprov|Specified Transaction}} has been broadened to include additional types of {{isdaprov|Transaction}}s market participants commonly add to Schedules to the Master Agreement, such as repos, and includes a catchall clause designed to include any future derivative products that are not specifically enumerated in this definition.

*'''{{isdaprov|Cross Default}}''': The formula for determining a {{isdaprov|Cross Default}} has been revised to permit the aggregation of amounts owed under multiple defaults. In determining whether the {{isdaprov|Cross Default}} threshold has been exceeded, the principal amount of the accelerated obligations in subparagraph (i) and the unpaid amount under subparagraph (ii) are added together to determine whether the {{isdaprov|Cross Default}} threshold has been exceeded. In the {{1992isda}}, subparagraphs (i) and (ii) could not be combined to evidence a {{isdaprov|Cross Default}}.  

*'''{{isdaprov|Merger Without Assumption}}''': The types of events that constitute a “[[merger]]” have been broadened to include reorganization, reincorporation and reconstitution, and the methods by which a resulting, surviving or transferee entity can assume obligations have been deleted.  

*'''{{isdaprov|Credit Support Default}}''': The failure of a security interest granted pursuant to a {{isdaprov|Credit Support Document}} now constitutes a {{isdaprov|Credit Support Default}}.  

*'''{{isdaprov|Set-Off}}''':  The absence of a {{isdaprov|Set-Off}} provision is seen by many as the biggest weakness of the {{1992isda}}. Although the User’s Guide to the {{1992isda}} included an optional {{isdaprov|Set-Off}} provision, the optional provision was not effective unless the parties added the provision to the Schedule to the {{1992isda}}. The {{2002isda}} remedies this concern by including a {{isdaprov|Set-Off}} provision that is similar to the provision included in the User’s Guide. This provision permits the Non- {{isdaprov|Defaulting Party}} to {{isdaprov|Set-Off}} any amounts owing between the parties against any early termination amount. While cross-product {{isdaprov|Set-Off}} is permitted, cross-affiliate {{isdaprov|Set-Off}} is not incorporated into this provision. The User’s Guide also suggested adding a representation to satisfy the requirement that mutuality must exist between the parties for a {{isdaprov|Set-Off}} to be effected. In response to this concern, the {{2002isda}} includes an additional representation in Section {{isdaprov|3(g)}} that both parties are principals in respect of all {{isdaprov|Transaction}}s.