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Events of Default - ISDA Provision: Difference between revisions
Events of Default - ISDA Provision (view source)
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{{ | {{fullanat2|isda|5(a)|1992|5(a)|2002}} | ||
==Section {{isdaprov|5(a)}}, {{isdama}}== | ==Section {{isdaprov|5(a)}}, {{isdama}}== | ||
{{isdaprov|5(a)(i)}} {{isdaprov|Failure to Pay or Deliver}}<br> | {{isdaprov|5(a)(i)}} {{isdaprov|Failure to Pay or Deliver}}<br> | ||
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{{isdaprov|5(a)(vii)}} {{isdaprov|Bankruptcy}}<br> | {{isdaprov|5(a)(vii)}} {{isdaprov|Bankruptcy}}<br> | ||
{{isdaprov|5(a)(viii)}} {{isdaprov|Merger without Assumption}}<br> | {{isdaprov|5(a)(viii)}} {{isdaprov|Merger without Assumption}}<br> | ||
{{comm}} | |||
===={{isdaprov|Additional Events of Default}}==== | ===={{isdaprov|Additional Events of Default}}==== | ||
Note that additional events of default may be set out in Part 5 of the [[ISDA Schedule]]. | Note that additional events of default may be set out in Part 5 of the [[ISDA Schedule]]. | ||
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{{isdaprov|Illegality}} trumps {{isdaprov|Event of Default}}. Be careful where, for example, a {{isdaprov|Failure to Pay}} is occasioned by a mandatory change in law by a government having jurisdiction over one or other counterparty - see {{isdaprov|Illegality}}. Good example: Greek capital controls of June 2015. | {{isdaprov|Illegality}} trumps {{isdaprov|Event of Default}}. Be careful where, for example, a {{isdaprov|Failure to Pay}} is occasioned by a mandatory change in law by a government having jurisdiction over one or other counterparty - see {{isdaprov|Illegality}}. Good example: Greek capital controls of June 2015. | ||
===={{isdaprov|Termination Events}} and Events of Default==== | ===={{isdaprov|Termination Events}} and {{isdaprov|Events of Default}}==== | ||
{{isdaprov|Termination Events}} and {{isdaprov|Events of Default}} under an {{isdama}} are similar in that when they occur to one party (the {{isdaprov|Affected Party}} or {{isdaprov|Defaulting Party}}) the other may terminate outstanding trades under the agreement. Differences: | {{isdaprov|Termination Events}} and {{isdaprov|Events of Default}} under an {{isdama}} are similar in that when they occur to one party (the {{isdaprov|Affected Party}} or {{isdaprov|Defaulting Party}}) the other may terminate outstanding trades under the agreement. Differences: | ||
*'''Events of Default''': As the word "default" implies EODs are treated as the ''fault'' the defaulting party and may give rise to third-party default rights (where the relevant {{isdaprov|Cross Default}} extends to derivatives and trading documents); | *'''Events of Default''': As the word "default" implies EODs are treated as the ''fault'' the defaulting party and may give rise to third-party default rights (where the relevant {{isdaprov|Cross Default}} extends to derivatives and trading documents); | ||
*'''Termination Events''': There is less "moral turpitude" associated with a Termination Event under an {{isdama}}, and they will generally not trigger Cross Defaults (not amounting to "defaults". | *'''Termination Events''': There is less "moral turpitude" associated with a Termination Event under an {{isdama}}, and they will generally not trigger Cross Defaults (not amounting to "defaults". | ||
{{eventsofdefault}} | |||
====Types of Events of Default==== | ====Types of Events of Default==== | ||
Events of Default can be categorised: | Events of Default can be categorised: | ||
*'''Independently Verifiable''': Some by their nature can independently verified without affirmation from the | *'''Independently Verifiable''': Some by their nature can independently verified without affirmation from the counterparty, particularly: | ||
**'''Direct Breaches''': direct breaches of the Agreement (eg {{isdaprov|Failure To Pay}}; {{isdaprov|Breach of Agreement}}); | **'''Direct Breaches''': direct breaches of the Agreement (eg {{isdaprov|Failure To Pay}}; {{isdaprov|Breach of Agreement}}); | ||
**'''Public Actions''': Events which are necessarily public (most of the {{isdaprov|Bankruptcy}} limbs; {{isdaprov|Merger Without Assumption}} | **'''Public Actions''': Events which are necessarily public (most of the {{isdaprov|Bankruptcy}} limbs; {{isdaprov|Merger Without Assumption}} | ||
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**other limbs of {{isdaprov|Bankruptcy}} (eg "has a secured party take possession of all or substantially all its assets". | **other limbs of {{isdaprov|Bankruptcy}} (eg "has a secured party take possession of all or substantially all its assets". | ||
*'''"Hard" Events of default''': Hard events where some positive action has actually been taken representing a default - such as a {{isdaprov|Failure to Pay}} | *'''"Hard" Events of default''': Hard events where some positive action has actually been taken representing a default - such as a {{isdaprov|Failure to Pay}} | ||
*'''"Soft" or "Passive" Events of Default''': where a state of affairs has arisen permitting a | *'''"Soft" or "Passive" Events of Default''': where a state of affairs has arisen ''permitting'' a hard {{isdaprov|Event of Default}} to be called, but it has not been designated it happened, such as {{isdaprov|Cross Default}}, where person owning the actual "hard" default right against your counterparty may not have triggered (or have any intention of triggering) it. | ||
That said, and for the same reason, such "not independently verifiable" termination/default events are effectively soft anyway, even where we have such an obligation from counterparty to notify us of their occurrence, because we have no means of policing whether or not the Counterparty has in fact notified us, and therefore no practical remedy anyway if it does not. It is a self certification, after all, and all we can rely on is its moral force and the party's competence to monitor its own position and be sufficiently organised to tell us. | That said, and for the same reason, such "not independently verifiable" termination/default events are effectively soft anyway, even where we have such an obligation from counterparty to notify us of their occurrence, because we have no means of policing whether or not the Counterparty has in fact notified us, and therefore no practical remedy anyway if it does not. It is a self certification, after all, and all we can rely on is its moral force and the party's competence to monitor its own position and be sufficiently organised to tell us. | ||