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Set-off - ISDA Provision: Difference between revisions
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{{fullanat|isda|6(f)|2002}} | {{fullanat|isda|6(f)|2002}} | ||
==={{2002ma}}=== | ==={{2002ma}}=== | ||
Set-off in the {{2002ma}} borrows from the text used to build it into the {{1992ma}} (see below). This glorious provision appears in the box to the right. In a nutshell: | |||
{{nuts|ISDA|set-off}} | {{nuts|ISDA|set-off}} | ||
This set-off provision imagines a world where | This set-off provision still contains a rather elementary fluff. It imagines a world where the {{isdaprov|Early Termination Amount}} is payable one way, while ''all'' {{isdaprov|Other Amounts}} are payable in the other. | ||
For example: | |||
{{Box| | {{Box| | ||
*{{isdaprov|Payer}} owes Payee an {{ETA}} of 10 | *{{isdaprov|Payer}} owes Payee an {{ETA}} of 10 | ||
| Line 35: | Line 29: | ||
{{box| {{isdaprov|6(f)}} {{isdaprov|Set-Off}}. Any {{isdaprov|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”), ...}} | {{box| {{isdaprov|6(f)}} {{isdaprov|Set-Off}}. Any {{isdaprov|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”), ...}} | ||
=== | ===Cross-[[affiliate]] [[set-off]]=== | ||
The | The {{2002ma}}’s {{isdaprov|Set-off}} provision refers to a “Payer” and “Payee”. | ||
*'''Affiliates''': Either the “{{isdaprov|Payer}}” or the “{{isdaprov|Payee}}” could be the non-{{isdaprov|Defaulting Party}} or the non-{{isdaprov|Affected Party}} | *'''Affiliates''': Either the “{{isdaprov|Payer}}” or the “{{isdaprov|Payee}}” could be the innocent<ref>i.e., non-{{isdaprov|Defaulting Party}} or the non-{{isdaprov|Affected Party}}.</ref> party, so including {{isdaprov|Affiliates}} into the 2002 Definition becomes problematic and cumbersome. | ||
**'''Where | |||
**'''Where | Generally, market practice is therefore to do the following: | ||
**'''Where {{isdaprov|Affiliate}}s are required''': to use bespoke wording. | |||
**If only some transactions are Affected Transactions and so only a portion of outstanding transactions are being terminated then there is an on-going relationship and unilateral set-off is not appropriate | **'''Where {{isdaprov|Affiliate}}s are not required''': use the {{2002ma}} standard {{isdaprov|set-off}} wording above. | ||
**i.e., if you ''weren't'' terminating all {{isdaprov|Transaction}}s, it would be drastic and counterproductive to a relationship | |||
===Scope of Set-off=== | |||
The {{2002ma}} {{isdaprov|set-off}} wording allows set-off following an {{isdaprov|Event of Default}}, {{isdaprov|CEUM}}, or any other {{isdaprov|Termination Event}} where there is one {{isdaprov|Affected Party}} and '''''all''''' outstanding transactions are {{isdaprov|Affected Transaction}}s. | |||
Often [[broker]]s will also want to set-off where there is an {{isdaprov|Illegality}} or {{isdaprov|ATE}}. There is no specific reference to all {{isdaprov|Transaction}}s being {{isdaprov|Affected Transaction}}s but this is implied in any set-off provision by its nature: | |||
**If only some transactions are {{isdaprov|Affected Transactions}} and so only a portion of outstanding transactions are being terminated then there is an on-going relationship and unilateral set-off is not appropriate. | |||
**i.e., if you ''weren't'' terminating all {{isdaprov|Transaction}}s, it would be drastic and counterproductive to a relationship to use a set-off. | |||
*As such, the standard [[ISDA]] provision and the {{Bank}} provision are very similar in scope - the {{isdaprov|Tax Event}} and {{isdaprov|Tax Event Upon Merger}} provisions (those not caught by your wording) are more likely to only affect certain transactions and not all Transactions and therefore set-off is not likely to be relevant in such instances. | *As such, the standard [[ISDA]] provision and the {{Bank}} provision are very similar in scope - the {{isdaprov|Tax Event}} and {{isdaprov|Tax Event Upon Merger}} provisions (those not caught by your wording) are more likely to only affect certain transactions and not all Transactions and therefore set-off is not likely to be relevant in such instances. | ||
*'''Force Majeure''': The | *'''{{isdaprov|Force Majeure}}''': The {{1992ma}} contains no {{isdaprov|Force Majeure}} provision. Commercially, it is not likely that an [[ISDA]] would be closed-out as a result of a {{isdaprov|Termination Event}} as these are generally viewed as non-fault and set-off would generally not be relevant. | ||
*'''{{isdaprov|Illegality}}''' does allow either party to terminate but this is limited to all {{isdaprov|Affected Transaction}}s which may not result in a [[close-out]] of the entire [[ISDA]]. In fact, the definition used of Affected Transactions makes it clear that in the cases of Illegality, Tax Event Upon Merger or Tax Event then it will only be transactions affected by the Termination Event that are closed-out. In relation to ATEs and CEUM this will be all Transactions and so set-off is relevant. | *'''{{isdaprov|Illegality}}''' does allow either party to terminate but this is limited to all {{isdaprov|Affected Transaction}}s which may not result in a [[close-out]] of the entire [[ISDA]]. In fact, the definition used of Affected Transactions makes it clear that in the cases of Illegality, Tax Event Upon Merger or Tax Event then it will only be transactions affected by the Termination Event that are closed-out. In relation to ATEs and CEUM this will be all Transactions and so set-off is relevant. | ||
{{ | ==={{1992ma}}=== | ||
The {{1992isda}} does not have a specific set off provision, although it manages to define {{isdaprov|Set-off}}, however: | |||
:{{clause|ISDA|Master Agreement|1992|Set-off Definition}} | |||
ISDA published a provision in the [[Users Guide]] but several bespoke versions of a set-off provision developed and were used in the market. These often provided for the inclusion of '''{{isdaprov|Affiliate}}s''' in relation to the {{isdaprov|Non-defaulting Party}} or {{isdaprov|Non-affected Party}}. It goes something like this: | |||
:<small>“'''{{isdaprov|Set-off}}'''. Without affecting the provisions of the {{isdaprov|Agreement}} requiring the calculation of certain net payment amounts, all payments under this {{isdaprov|Agreement}} will be made without [[set-off]] or counterclaim; provided, however, that upon the designation of an {{isdaprov|Early Termination Date}} following an {{isdaprov|Event of Default}}, or a {{isdaprov|Termination Event}} under Section {{isdaprov|5(b)(iv)}} or Section {{isdaprov|5(b)(v)}}, in addition to and not in limitation of any other right or remedy (including any right to set off, counterclaim, or otherwise withhold payment or any recourse to any {{isdaprov|Credit Support Document}}) under applicable law the {{isdaprov|Non-defaulting Party}} or {{isdaprov|non-Affected Party}}}} (in either case, “X”) may without prior notice to any person set off any sum or obligation (whether or not arising under this {{isdaprov|Agreement}} and whether matured or unmatured, whether or not contingent and {{f|irrespective}} of the currency, place of payment or booking office of the sum or obligation) owed by the {{isdaprov|Defaulting Party}} or {{isdaprov|Affected Party}} (in either case, “Y”) to X or any {{isdaprov|Affiliate}} of X against any sum or obligation (whether or not arising under this {{isdaprov|Agreement}}, whether matured or unmatured, whether or not contingent and {{f|irrespective}} of the currency, place of payment or booking office of the sum or obligation) owed by X or any {{isdaprov|Affiliate}} of X to Y and, for this purpose, may convert one currency into another at a market rate determined by X. If any sum or obligation is unascertained, X may in[[good faith]] estimate that sum or obligation and [[set-off]] in respect of that estimate, subject to X or Y, as the case may be, accounting to the other party when such sum or obligation is ascertained. Nothing in this {{isdaprov|Agreement}} [[shall]] create or be [[deem]]ed to create any [[charge]] under English law.”</small> | |||