Potential Event of Default - ISDA Provision
2002 ISDA Master Agreement
Definition of Potential Event of Default in full
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A Potential Event of Default is a Failure to Pay or Deliver, Breach of Agreement (or other Event of Default) with an unexpired grace period, or where the grace period has expired but the Non-defaulting Party hasn’t (yet) given a notice of default actually accelerating the default into an actual Event of Default.
Grace periods and notice requirements for each Event of Default
- Failure to Pay or Deliver has both a short grace period and requires notice from the Non-defaulting Party before it becomes a full EOD;
- Breach of Agreement has an unusably, epochally long grace period — I mean thirty fricking days! — and requires notice from the Non-defaulting Party before it becomes a full EOD;
- Credit Support Default has no grace period or notice requirement, but there’s a good argument that any grace periods and notice requirements under the Credit Support Document in question would get pulled in by reference, so they are there in effect;
- Misrepresentation has neither a grace period or a notice requirement. The theory being a representation — any representation other than a tax one — being a statement inducing one to enter into the contract in the first place —is of such fundamental moment that its untruth justifies summary execution. Careful here, though, misrepresentations are a bit of a minefield to step through. See especially section 3(d).
- DUST references notice requirements and grace periods under the Specified Transaction (where there is has been a default) but not where it is a repudiation, but that kind of figures.
- Cross Default, that most absurd of all Events of Default, has no notice requirement, no grace period, and doesn't even require the lender of the Specified Indebtedness to have exercised a termination right — though any grace period under the Specified Indebtedness still applies.
- Bankruptcy has no notice requirement or grace period (indeed, on Automatic Termination Event applies it may happens even without the Non-defaulting Party’s knowledge), though there are some grace periods under the various tedious limbs of Bankruptcy definition, and these vary by edition of the ISDA Master Agreement;
- Merger Without Assumption has neither notice requirement or grace period — again not unreasonable, since a merger without assumption is tantamount to a repudiation of contract, and if you’re no longer playing the game, I don’t see why I should.