1992 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
5(b)(ii) in a Nutshell™
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5(b)(ii) in all its glory
- 5(b)(ii) Tax Event. Due to:
- (x) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or
- (y) a Change in Tax Law,
- the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Payment Date
- (1) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or
- (2) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B));
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No real change from the 1992 ISDA. Note, unhelpfully, the sub-paragraph reference in the 1992 ISDA is (1) and (2) and in the 2002 ISDA is (A) and (B). Otherwise, pretty much the same.
Basically the gist is this: if the rules change after the Trade Date such that you have to gross up an Indemnifiable Tax would weren't expecting to when you priced the trade, you have a right to get out of the trade, rather than having to ship the gross up for the remainder of the Transaction.
That said, this paragraph is a bastard to understand. Have a gander at the JC’s nutshell version (premium only, sorry) and you’ll see it is not such a bastard after all, then.
In the context of cleared swaps, you typically add a third limb, which is along the lines of:
- (3) required to make a deduction from a payment under an Associated LCH Transaction where no corresponding gross up amount is required under the corresponding Transaction Payment under this Agreement.
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Template:M sa 1992 ISDA 5(b)(ii)
- ↑ The line breaks are for comprehension and do not appear in the original