2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
6(f) in a Nutshell™
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6(f) in all its glory
. Any Early Termination Amount
payable to one party (the “Payee
”) by the other party (the “Payer
”), in circumstances where there is a Defaulting Party
or where there is one Affected Party
in the case where either a Credit Event Upon Merger
has occurred or any other Termination Event
in respect of which all outstanding Transactions
are Affected Transactions
has occurred, will, at the option of the Non-defaulting Party
or the Non-affected Party
, as the case may be (“X”) (and without prior notice to the Defaulting Party or the Affected Party, as the case may be), be reduced by its set-off against any other amounts (“Other Amounts
”) payable by the Payee
to the Payer
(whether or not arising under this Agreement
, matured or contingent and irrespective of the currency, place of payment or place of booking of the obligation). To the extent that any Other Amounts
are so set off, those Other Amounts
will be discharged promptly and in all respects. X will give notice to the other party of any set-off effected under this Section 6(f)
For this purpose, either the Early Termination Amount or the Other Amounts (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, in good faith and using commercially reasonable procedures, to purchase the relevant amount of such currency.
If an obligation is unascertained, X may in good faith estimate that obligation and set off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained.
Nothing in this Section 6(f) will be effective to create a charge or other security interest. This Section 6(f) will be without prejudice and in addition to any right of set-off, offset, combination of accounts, lien, right of retention or withholding or similar right or requirement to which any party is at any time otherwise entitled or subject (whether by operation of law, contract or otherwise).
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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.
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.
But what if there are Other Amounts payable the same way as the Early Termination Amount?
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