Illegality - 1992 ISDA Provision
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1992 ISDA Master Agreement
Section 5(b)(i) in a Nutshell™ Use at your own risk, campers!
Full text of Section 5(b)(i)
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As its clause numbering indicates, Illegality is a Section 5(b) Termination Event — being one of those irritating vicissitudes of life that are no-one’s fault but which mean things cannot go on, and not a Section 5(a) Event of Default, being those perfidious actions of one or other Party which bring matters to an end which, but for that behaviour, ought really to have been avoided.
Note also the impact of Illegality and Force Majeure on a party’s obligations to perform through another branch under Section 5(e), which in turn folds into the spectacular optional representation a party may make under 10(a) to state the blindingly obvious, namely that the law as to corporate legal personality is as is commonly understood by first year law students. Who knows — maybe it is different in emerging markets and former Communist states?
For the silent great majority of swap entities for whom it is not, the curious proposition arises: what is the legal, and contractual, consequence of electing not to state the blindingly obvious? Does that mean it is deemed not to be true?
Summary
1992 User Guide
Section 5(b)(i) provides that a Termination Event will occur if it becomes unlawful for a party (or if relevant its Credit Support Provider) to:
- make or receive a payment or delivery
- comply with any material provision of a 1992 ISDA or
- perform under a Credit Support Document.
The party to whom the Illegality has occurred will be the “Affected Party”. This Termination Event excludes breach by a party of its Section 4(b) obligation to maintain authorizations necessary under a 1992 ISDA or any Credit Support Document. Any such breach thus will be treated as an Event of Default and not an Illegality.
This Termination Event has been modified from the 1987 ISDA to refer to physically-settled transactions and to replace the reference to “Specified Entity” in the corresponding provision of the 1987 ISDA with “Credit Support Provider” because clause (2) of Illegality relates to Credit Support Documents.
Section 5(c) provides that an Event of Default with is also an Illegality will be treated as an Illegality.