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2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
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Section 6(b) in a Nutshell™
Use at your own risk, campers!
6(b) Right to Terminate Following Termination Event.
- 6(b)(i) Notice. Upon becoming aware of a Termination Event the Affected Party will promptly give the other party with reasonable details of it and each Affected Transaction (or, if it is a Force Majeure Event, make reasonable efforts to do so).
- 6(b)(ii) Transfer to Avoid Termination Event
- If there is a Tax Event with only one Affected Party or a Tax Event Upon Merger where the Burdened Party is the Affected Party, before designating an Early Termination Date the Affected Party must use all reasonable efforts to transfer, within 20 days of giving notice of the Termination Event, all its rights and obligations under the Affected Transactions to one of its Offices or Affiliates so that the Termination Event ceases to exist.
- If it cannot make such a transfer, it will advise the other party within the 20 day period, and the other party may effect such a transfer within 30 days after the original notice of Termination Event.
- Any such transfer by a party under this Section will require the of the other party’s prior written consent (which may not be withheld if the other party’s prevailing policies would permit it to enter into transactions on the terms proposed).
- 6(b)(iii) Two Affected Parties. If there is a Tax Event with two Affected Parties, each must use all reasonable efforts agree within 30 days after the Termination Event Notice to avoid it.
- 6(b)(iv) Right to Terminate
- (1) Termination Events other than Illegality and Force Majeure Events: If the Termination Event still exists but:―
- (A) Tax Termination Events: a neither party has managed to avoid a Tax Event or Tax Event Upon Merger as contemplated in Section 6(b)(ii) or 6(b)(iii) within 30 days of a Termination Event Notice; or
- (B) Other Termination Events: there is a Credit Event Upon Merger, an Additional Termination Event or a Tax Event Upon Merger where the Burdened Party is not the Affected Party:
- either party (if both are Affected Parties) or the Non-Affected Party (in any other case) may, on not more than 20 days’ notice, designate an Early Termination Date for all Affected Transactions.
- (2) Illegality and Force Majeure Events: If an Illegality or Force Majeure Event still exists when its Waiting Period has expired:―
- (A) Subject to clause (B) below, either party may, on not more than 20 days’ notice, designate an Early Termination Date:
- (I) for all Affected Transactions, or
- (II) for fewer than all Affected Transactions by specifying which Affected Transactions it wishes to terminate, effective no earlier than two Local Business Days following the effective day of its notice, as an Early Termination Date for those designated Affected Transactions only. In this case the other party may, by notice, terminate any of the outstanding Affected Transactions as of the same Early Termination Date.
- (B) Where the Illegality or Force Majeure Event relates to performance under a Credit Support Document, an Affected Party may only designate an Early Termination Date following designation by the other party of an Early Termination Date, for fewer than all Affected Transactions under this Section.
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Full text of Section 6(b)
6(b) Right to Terminate Following Termination Event.
- 6(b)(i) Notice. If a Termination Event other than a Force Majeure Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction, and will also give the other party such other information about that Termination Event as the other party may reasonably require. If a Force Majeure Event occurs, each party will, promptly upon becoming aware of it, use all reasonable efforts to notify the other party, specifying the nature of that Force Majeure Event, and will also give the other party such other information about that Force Majeure Event as the other party may reasonably require.
- 6(b)(ii) Transfer to Avoid Termination Event. If a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, other than immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist.
- If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i).
- Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such other party’s policies in effect at such time would permit it to enter into transactions with the transferee on the terms proposed.
- 6(b)(iii) Two Affected Parties. If a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice of such occurrence is given under Section 6(b)(i) to avoid that Termination Event.
- 6(b)(iv) Right to Terminate.
- (1) If:―
- (A) a transfer under Section 6(b)(ii) or an agreement under Section 6(b)(iii), as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or
- (B) a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Party is not the Affected Party,
- the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there are two Affected Parties, or the Nonaffected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, if the relevant Termination Event is then continuing, by not more than 20 days notice to the other party, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions.
- (2) If at any time an Illegality or a Force Majeure Event has occurred and is then continuing and any applicable Waiting Period has expired:―
- (A) Subject to clause (B) below, either party may, by not more than 20 days notice to the other party, designate (I) a day not earlier than the day on which such notice becomes effective as an Early Termination Date in respect of all Affected Transactions or (II) by specifying in that notice the Affected Transactions in respect of which it is designating the relevant day as an Early Termination Date, a day not earlier than two Local Business Days following the day on which such notice becomes effective as an Early Termination Date in respect of less than all Affected Transactions. Upon receipt of a notice designating an Early Termination Date in respect of less than all Affected Transactions, the other party may, by notice to the designating party, if such notice is effective on or before the day so designated, designate that same day as an Early Termination Date in respect of any or all other Affected Transactions.
- (B) An Affected Party (if the Illegality or Force Majeure Event relates to performance by such party or any Credit Support Provider of such party of an obligation to make any payment or delivery under, or to compliance with any other material provision of, the relevant Credit Support Document) will only have the right to designate an Early Termination Date under Section 6(b)(iv)(2)(A) as a result of an Illegality under Section 5(b)(i)(2) or a Force Majeure Event under Section 5(b)(ii)(2) following the prior designation by the other party of an Early Termination Date, pursuant to Section 6(b)(iv)(2)(A), in respect of less than all Affected Transactions.
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Related agreements and comparisons
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Content and comparisons
Changes largely to account for the new Force Majeure Event and some tidying up, but beyond that Section 6(b) works in the same general way under the 1992 ISDA and 2002 ISDA.
Summary
There is a difference between Termination Events that are non-catastrophic, and usually Transaction-specific, and those that are catastrophic, which are usually counterparty specific.
Non-catastrophic ones affecting just a subset of Transactions might be caused by, say, a Tax Event or a local Illegality, but in any weather do not concern the solvency, creditworthiness or basic mendacity of your counterparty. They generally won’t have much, directly, to do with your counterparty at all beyond the jurisdictions it inhabits and the laws it is subject to. These are generally the Termination Events, but not Additional Termination Events.
The catastrophic ones are by their nature affect — that is, “Affect” — all Transactions. These generally are the bespoke Additional Termination Events your credit department insisted on — or theirs did; they will have something to do with the naughtiness of lack of fibre of your counterparty (or you!), and these function for most respects a lot more like Events of Default.
Thus, in the drafting of ISDA Schedules, CSAs and so on, you will often find laboured reference to Events of Default and/or Termination Events which lead to Early Termination Dates with respect to all outstanding Transactions as some kind of special, hyper-exciting, class of Termination Event.
Lucky premium content subscribers get a lot more discussion about the practical implications of all the above and a table comparing the events.
General discussion
You may find yourself staring at this forbidding north wall of text — on of the most fearsome north walls in all derivatives mountaineering — and for a while begin to wonder whether your eyes are burning, or your brains leaking out of your ears. And just wait till you see what a structured finance lawyer will do with it. there are crevices, cracks, ice-covered chimneys, great glazed traverses which have claimed many a valiant eaglet.
But, friends, we are aeronauts of the spirit!
“Why just in this direction, thither where all the suns of humanity have hitherto gone down? Will it perhaps be said of us one day that we too, steering westward, hoped to reach an India – but that it was our fate to be wrecked against infinity?”[1]
Let us not be daunted by der Morderwand!
It starts off gently. If you are subject to a Termination Event — remember these are generally extraneous things beyond your control like Tax Events, Illegality, Force Majeure, for which you can’t really be blamed, but which affect your capacity to efficiently perform the agreement, so this is nothing really to be ashamed about, even though it might colour your counterparty’s view of carrying on — you must notify your counterparty.
Things start to go a bit wobbly. You sense that ISDA’s crack drafting squad™ has been on the sauce, or marching powder or something, and became attached to the idea of trying to codify the unknowable future. It gets worse before it gets better but here the permutations are about the parties tax status: either the Tax law has changed for one or other party — a Tax Event — or a party has executed some fancy cross-border merger which has somehow changed its tax residence, status, or eligibility of favourable tax treatment: this is a Tax Event Upon Merger. Here, in essence, you have a little window to sort yourself out, if you hadn’t done that before the merger (isn’t that what Tax advisors are for, by the way?).
Tax Event Upon Merger is also apt to create magnificent rounds of three-dimensional ninja combat drafting, because there is an Affected Party, and a Burdened Party, and they are not ~ necessarily ~ the same, and that is even before you worry about what has happened if there is a Credit Event Upon Merger (could be, right? There is a merger... so why not?) and/or a Force Majeure going on at the same time.
In any case: the Affected Party of a simple Tax Event, or the Affected Party of a TEUM who is also the Burdened Party must try doggedly for twenty days to transfer its rights and obligations to an unaffected Office or Affiliate before it is allowed to trigger an Early Termination Date. In any case the innocent, Unaffected Party, has a varnished right to decline the transfer if it can’t trade with the designated transferee.
Well, if they are both Affected Parties they can do their best to agree a fix, but this is what all eagle-eyed members of legal squad will recognise as an agreement to agree.
Template:M gen 2002 ISDA 6(b)(iv)
Section 6(b)(iv) Right to Terminate
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”, which 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: 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 or worked-around, and dented Transactions that can’t be panel-beaten back into shape may be surgically excised, 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[2] 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[3], 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.
See also
Template:M sa 2002 ISDA 6(b)
References