Right to Terminate - 1992 ISDA Provision
Content and comparisons
One’s right to terminate early following an Illegality or the newly introduced Force Majeure Termination Event get a proper makeover in the 2002 ISDA, but otherwise, the provisions are the same, but for some formal fiddling in the drafting.
What a beast. If you track it through in nutshell terms, it isn’t as bad as it looks, but you have the ISDA ninja’s gift for over-complication, and ISDA’s crack drafting squad™’s yen for dismal drafting, to thank for this being the trial it is.
To make it easier, we’ve invented some concepts and taken a few liberties:
- “Unaffected Transaction” — saves you all that mucking around saying “Transactions other than those that are, or are deemed, to be Affected Transactions” and so on);
- Termination Event Notice as an elegant and self-explanatory alternative to “after an Affected Party gives notice under Section 6(b)(i)”
- We take it as logically true that you can’t give 20 days’ notice of something which you then say will happen in fewer than 20 days. Therefore, there is no need for all this “designate a day not earlier than the day such notice is effective” nonsense.
So with that all out the way, here is how it works. Keep in mind that, unlike Events of Default, Termination Events can arise through no fault of the Affected Party and, therefore, are not always as apocalyptic in consequence. Depending what they are, they may be cured, worked around, and dented Transactions that casn’t be panelbeaten back into shape may be surgically trimmed out, allowing the remainder of the ISDA Master Agreement, and all Unaffected Transactions under it, to carry on as normal. So here goes:
Divide up the types of Termination Event
- Tax ones: If a Tax Event or a TEUM where the party merging is the one that suffers the tax, the parties have a month to try to rearrange matters between them, their offices and affiliates to avoid the tax issue. Only once that has failed are you in Termination Event territory. See Section 6(b)(ii) and 6(b)(iii).
- Non-Affected Party ones: If it’s a CEUM, an ATE or a TEUM where the Non-Affected Party suffers the tax, then if the other guy is a Non-Affected Party, then (whether or not you are) you may designate an Early Termination date for the Affected Transactions.
- Illegality and Force Majeure: Here, if you are on a 2002 ISDA, there may be a Waiting Period to sit through, to see whether the difficulty clears. For Force Majeure Event it is eight Local Business Days; for Illegality other than one preventing performance of a Credit Support Document: three Local Business Days. So, sit through it. Why is there exception for Illegality on a Credit Support Document? Because, even though it wasn’t your fault, illegality of a Credit Support Document profoundly changes your credit assessment (in a way that arguably, even a payment or delivery obligation doesn’t), and that is the most fundamental risk you are managing under the ISDA Master Agreement.
I know, I know, I know: to a thoroughbred ISDA ninja, repackaging SPVs are non-canonical heretical fan fiction and we shouldn’t really even talk about them, but still: when perusing part 1 of a repack SPV’s schedule you may see statements like this:
If an Additional Termination Event occurs, an Early Termination Date for the Transaction will occur immediately. The references to “Additional Termination Event” in Section 6(b)(iv) will be deleted.
This is just a tacit recognition that the swap in a repackaging structure is part of a greater whole, and there are people depending on it (viz., noteholders) and who care about it more than the actual counterparty to the swap (which is, after all, a mindless espievie), but who, by dint of their shadowy and anonymous existence as bearer noteholders, are in no position to ensure things happen promptly. So rather than leaving it for all this nonsense with designating notices, it just kicks off automatically, allowing the various slaves, drones and pleasurebots that attend to an espievie’s every need, to go about unwinding the note.
Template:M gen 1992 ISDA 6(b)(iv)
Template:M sa 1992 ISDA 6(b)(iv)