Illegality - ISDA Provision: Difference between revisions

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Illegality - ISDA Provision (view source)

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{{isdacomparison}}{{isdaanat|5(b)(i)}}
{{newisdamanual|Illegality}}
==1992 User Guide==
Section 5(b)(i) provides that a {{isdaprov|Termination Event}} will occur if it becomes unlawful for a party to make a payment or delivery or receive a payment or delivery or comply with any material provision of a 1992 Agreement or it becomes unlawful for a party or a {{isdaprov|Credit Support Provider}} to perform under a Credit Support Document. The party in respect of which the Illegality has occurred will be the Affected Party. This Termination Event excludes any event which results from a breach by a party of the agreement in Section 4(b) to maintain authorizations necessary in connection with a 1992 Agreement or any Credit Support Document. Any such breach thus will be treated as an Event of Default and not an Illegality.
 
This {{isdaprov|Termination Event}} has been modified from the 1987 Agreement to make reference to transactions that settle by physical delivery and to replace the reference to “{{isdaprov|Specified Entity}}” in the corresponding provision of the 1987 Agreement with “{{isdaprov|Credit Support Provider}}” because clause (2) of {{isdaprov|Illegality}} relates to {{isdaprov|Credit Support Document}}s.
 
Section 5(c) of the 1992 Agreements addresses the case where an Event of Default occurs that also constitutes an Illegality by providing that such a case will be treated as an Illegality.
==2002 User Guide==
{{isdaprov|Illegality}}. Section 5(b)(i) provides that a {{isdaprov|Termination Event}} will occur if (after a {{isdaprov|Transaction}} is entered into and other than due to any action taken by a party or, if applicable, its {{isdaprov|Credit Support Provider}} or a breach by the party of its obligations under Section 4(b)) it becomes unlawful under any applicable law (i) for the {{isdaprov|Office}} through which a party makes and receives payments or deliveries with respect to such {{isdaprov|Transaction}} to make or receive a payment or 4 The two Tax-related {{isdaprov|Termination Event}}s are addressed in Section IV below.
 
16 delivery under such {{isdaprov|Transaction}} or to comply with any material provision of the {{2002ma}} with respect to such {{isdaprov|Transaction}}; or (ii) for a party or its {{isdaprov|Credit Support Provider}} to perform under a {{isdaprov|Credit Support Document}} (whether to make or receive a payment or delivery or to comply with any other material provision of such {{isdaprov|Credit Support Document}}). {{isdaprov|Illegality}}, like {{isdaprov|Force Majeure Event}} (see Section II.F.3.b.below) but unlike other {{isdaprov|Termination Event}}s, is anticipatory in that it may be triggered if it would be unlawful to make a payment or delivery or to comply on a day if the relevant payment, delivery or compliance were required on that day, even if no such payment, delivery or compliance is in fact required on that day. The party in respect of which the {{isdaprov|Illegality}} has occurred will be the {{isdaprov|Affected Party}} (although both parties could be Affected Parties depending on the circumstances).
 
Where performance under a {{isdaprov|Transaction}} is concerned, note that, by focusing on the ability of a party’s {{isdaprov|Office}} through which it makes and receives payments or deliveries with respect to such {{isdaprov|Transaction}} to perform, an {{isdaprov|Illegality}} could still occur despite the fact that the party may be able to satisfy its obligations by making or receiving a payment or delivery through another of its {{isdaprov|Office}}s. In the {{1992ma}}, {{isdaprov|Illegality}} focused simply on the ability of “a party” to perform.
 
It is important to note that an {{isdaprov|Illegality}}, like a {{isdaprov|Force Majeure Event}}, may only be triggered after giving effect to any applicable provision, disruption fallback or remedy specified in a {{isdaprov|Confirmation}} or elsewhere in the {{2002ma}}. For example, if the parties have incorporated the {{isdadefs|1998|FX and Currency Option}} or the {{isdadefs|2002|Equity Derivatives}} in the relevant {{isdaprov|Confirmation}}, any applicable disruption events and related fallbacks in these definitional booklets will be given effect and there may be no role for the {{isdaprov|Illegality}} (or {{isdaprov|Force Majeure Event}}) {{isdaprov|Termination Event}}. If, however, the applicable fallbacks, if any, do not resolve the problem, {{isdaprov|Illegality}} (or {{isdaprov|Force Majeure Event}}) may come into play. In view of the anticipatory nature of {{isdaprov|Illegality}} (and {{isdaprov|Force Majeure Event}}), these types of fallbacks may not, under the terms of the {{isdaprov|Confirmation}} for the {{isdaprov|Transaction}}, in fact apply at the time a party believes an {{isdaprov|Illegality}} (or a {{isdaprov|Force Majeure Event}}) has occurred.
 
The obligation of the {{isdaprov|Affected Party}} under the {{1992ma}} to use all reasonable efforts to transfer Affected {{isdaprov|Transaction}}s in order to avoid the occurrence of the {{isdaprov|Termination Event}} is not included in the {{2002ma}}. Deferral of payments and deliveries after an {{isdaprov|Illegality}} occurs is discussed in Section II.F.3.b.1. below.
 
==Illegality vs. Force Majeure==
Note that under the 2002, {{isdaprov|Illegality}} trumps {{isdaprov|Force Majeure}}. Given that Illegality is no longer subject to the "two Affected Parties" delay on termination (as it was in the {{1992ma}}, this is significant.
{{sa}}
*{{isdaprov|Transaction}}
*{{isdaprov|Affected Party}}
*{{isdaprov|Credit Support Provider}}
*{{isdaprov|Credit Support Document}}
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