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ISDA Comparison: Difference between revisions
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So, you were wondering “what are the main differences between the {{1992isda}} and the {{2002isda}}?” Well, funny you should ask. I had the same question once upon a time, so I | So, you were wondering “what are the main differences between the {{1992isda}} and the {{2002isda}}?” Well, funny you should ask. I had the same question once upon a time, so I found out. They are below.<ref>What is that you say? You ''weren’t'' wondering about the differences between the {{1992isda}} and the {{2002isda}}? Well, in that case you might like [[Otto Büchstein]]’s uncelebrated opera, [[La Vittoria della Forma sulla Sostanza]]. </ref> | ||
===[[Close-out]] method=== | ===[[Close-out]] method=== | ||
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===={{isdaprov|Events of Default}} ==== | ===={{isdaprov|Events of Default}} ==== | ||
The {{isdaprov|Events of Default}} in the {{1992isda}} | The {{isdaprov|Events of Default}} in the {{1992isda}} were not massively changed in the {{2002isda}}. Some revisions were made to reflect changes in market practice (by which parties would religiously, tediously, amend their 1992 {{isdaprov|Schedules}}) including: | ||
*'''Cure Periods''': Some of the cure periods were reduced out of the concern that these cure periods create undue risk when market volatility increases in times of turmoil in the financial markets. This was addressed in the {{2002isda}} by: | *'''Cure Periods''': Some of the cure periods were reduced out of the concern that these cure periods create undue risk when market volatility increases in times of turmoil in the financial markets. This was addressed in the {{2002isda}} by: | ||
#reducing the cure period for a failure to pay or deliver pursuant to Section 5(a)(i) from three Local Business Days to one Local Business Day following notice of such failure; | #reducing the cure period for a failure to pay or deliver pursuant to Section 5(a)(i) from three Local Business Days to one Local Business Day following notice of such failure; | ||
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#This {{isdaprov|Event of Default}} may now be triggered by a default under a credit support arrangement relating to a {{isdaprov|Specified Transaction}} . {{isdaprov|Specified Transaction}} credit support arrangements were not addressed in the {{1992isda}}. | #This {{isdaprov|Event of Default}} may now be triggered by a default under a credit support arrangement relating to a {{isdaprov|Specified Transaction}} . {{isdaprov|Specified Transaction}} credit support arrangements were not addressed in the {{1992isda}}. | ||
# As discussed above, the cure period for the failure to make a final payment or early termination payment in respect of a {{isdaprov|Specified Transaction}} has been reduced from three days to one. | # As discussed above, the cure period for the failure to make a final payment or early termination payment in respect of a {{isdaprov|Specified Transaction}} has been reduced from three days to one. | ||
#The repudiation subsection was modified in two significant ways: (i) the phrase “or challenges the validity of” was added after “disaffirms, disclaims, repudiates or rejects” to reduce ambiguity as to whether a party’s action | #The [[repudiation]] subsection was modified in two significant ways: (i) the phrase “or challenges the validity of” was added after “disaffirms, disclaims, repudiates or rejects” to reduce ambiguity as to whether a party’s action constitutes a repudiation; and (ii) a Non-{{isdaprov|Defaulting Party}} is now required to possess evidence of such repudiation that is executed and delivered by the {{isdaprov|Defaulting Party}}, its Credit Support Provider, or a Specified Entity; (iii) The definition of {{isdaprov|Specified Transaction}} has been broadened to include additional types of {{isdaprov|Transaction}}s market participants commonly add to Schedules to the Master Agreement, such as repos, and includes a catchall clause designed to include any future derivative products that are not specifically enumerated in this definition. | ||
*'''{{isdaprov|Cross Default}}''': The formula for determining a {{isdaprov|Cross Default}} has been revised to permit the aggregation of amounts owed under multiple defaults. In determining whether the {{isdaprov|Cross Default}} threshold has been exceeded, the principal amount of the accelerated obligations in subparagraph (i) and the unpaid amount under subparagraph (ii) are added together to determine whether the {{isdaprov|Cross Default}} threshold has been exceeded. In the {{1992isda}}, subparagraphs (i) and (ii) could not be combined to evidence a {{isdaprov|Cross Default}}. | *'''{{isdaprov|Cross Default}}''': The formula for determining a {{isdaprov|Cross Default}} has been revised to permit the aggregation of amounts owed under multiple defaults. In determining whether the {{isdaprov|Cross Default}} threshold has been exceeded, the principal amount of the accelerated obligations in subparagraph (i) and the unpaid amount under subparagraph (ii) are added together to determine whether the {{isdaprov|Cross Default}} threshold has been exceeded. In the {{1992isda}}, subparagraphs (i) and (ii) could not be combined to evidence a {{isdaprov|Cross Default}}. | ||
*'''{{isdaprov|Merger Without Assumption}}''': The types of events that constitute a | *'''{{isdaprov|Merger Without Assumption}}''': The types of events that constitute a “[[merger]]” have been broadened to include reorganization, reincorporation and reconstitution, and the methods by which a resulting, surviving or transferee entity can assume obligations have been deleted. | ||
*'''{{isdaprov|Credit Support Default}}''': The failure of a security interest granted pursuant to a {{isdaprov|Credit Support Document}} now constitutes a {{isdaprov|Credit Support Default}}. | *'''{{isdaprov|Credit Support Default}}''': The failure of a security interest granted pursuant to a {{isdaprov|Credit Support Document}} now constitutes a {{isdaprov|Credit Support Default}}. | ||
*'''{{isdaprov|Set-Off}}''': The absence of a {{isdaprov|Set-Off}} provision is seen by many as the biggest weakness of the {{1992isda}}. Although the User’s Guide to the {{1992isda}} included an optional {{isdaprov|Set-Off}} provision, the optional provision was not effective unless the parties added the provision to the Schedule to the {{1992isda}}. The {{2002isda}} remedies this concern by including a {{isdaprov|Set-Off}} provision that is similar to the provision included in the User’s Guide. This provision permits the Non- {{isdaprov|Defaulting Party}} to {{isdaprov|Set-Off}} any amounts owing between the parties against any early termination amount. While cross-product {{isdaprov|Set-Off}} is permitted, cross-affiliate {{isdaprov|Set-Off}} is not incorporated into this provision. The User’s Guide also suggested adding a representation to satisfy the requirement that mutuality must exist between the parties for a {{isdaprov|Set-Off}} to be effected. In response to this concern, the {{2002isda}} includes an additional representation in Section 3(g) that both parties are principals in respect of all {{isdaprov|Transaction}}s. | *'''{{isdaprov|Set-Off}}''': The absence of a {{isdaprov|Set-Off}} provision is seen by many as the biggest weakness of the {{1992isda}}. Although the User’s Guide to the {{1992isda}} included an optional {{isdaprov|Set-Off}} provision, the optional provision was not effective unless the parties added the provision to the Schedule to the {{1992isda}}. The {{2002isda}} remedies this concern by including a {{isdaprov|Set-Off}} provision that is similar to the provision included in the User’s Guide. This provision permits the Non- {{isdaprov|Defaulting Party}} to {{isdaprov|Set-Off}} any amounts owing between the parties against any early termination amount. While cross-product {{isdaprov|Set-Off}} is permitted, cross-affiliate {{isdaprov|Set-Off}} is not incorporated into this provision. The User’s Guide also suggested adding a representation to satisfy the requirement that mutuality must exist between the parties for a {{isdaprov|Set-Off}} to be effected. In response to this concern, the {{2002isda}} includes an additional representation in Section {{isdaprov|3(g)}} that both parties are principals in respect of all {{isdaprov|Transaction}}s. | ||
{{ref}} | {{ref}} | ||