Set-off - ISDA Provision
2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™ 6(f) in all its glory
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Overview
The 1992 ISDA does not have a specific set off provision, although it manages to define Set-off anyway.
ISDA published a suggested set-off provision in the Users Guide but no-one liked it, and several bespoke versions developed and percolated around the market. These often provided for the inclusion of Affiliates in relation to the Non-defaulting Party or Non-affected Party.
ISDA’s crack drafting squad™ got the hint and implemented a fully-fledged set-off provision based on this language into the 2002 ISDA — but not without a little boo-boo. You can read all about it, and the boo-boo, and what people have done to fix it, at our article about that Section 6(f) Set-off provision.
Summary
One does not exercise a set-off right willy nilly. Unless one is, mutually, settlement netting (where on a given day I owe you a sum, you owe me a sum, and we agree to settle by one of us paying the other the difference) set-off is a drastic remedy which will be seen as enemy action. You would not do it, without agreement, to any client you expected to keep. So, generally, use set-off as a remedy it only arises following an event of default.
A bit of a bish in the 2002 ISDA
Set-off in the 2002 ISDA borrows from the text used to build it into the 1992 ISDA (see below) but still contains a rather elementary fluff. It imagines a world where the Early Termination Amount is payable one way, while all Other Amounts are only payable the other. Life, as any fule kno, is not always quite that convenient.
For example:
- Payer owes Payee an Early Termination Amount of 10
- Payee owes Payer Other Amounts of 50
But what if there are Other Amounts payable the same way as the Early Termination Amount?
- Payer owes Payee an Early Termination Amount of 10
- Payer owes Payee Other Amounts of 40
- Payee owes Payer Other Amounts of 50
Not ideal. But fixable if you’re prepared to add some dramatically anal language:
- 6(f) Set-Off. Any Early Termination Amount (or any other amounts, whether or not arising under this Agreement, matured, contingent and irrespective of the currency, place of payment of booking of the obligation)” payable to one party (the “Payee”) by the other party (the “Payer”), ...
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- The JC’s famous Nutshell™ summary of this clause
- A red letter day for ISDA’s crack drafting squad™
- Scope of set-off
- Cross-affiliate set-off
- A critique of the standard cross-affiliate set off wording
- Our own suggestion for you to use at your own risk
See also
- Set-off generally
- Settlement netting