The Jolly Contrarian

Template:Isda Defaulting Party and Affected Party summ

Defaulting Party

The key thing to notice here is that — in an uncharacteristically rather neat, understated bit of drafting — Defaulting Party encapsulates a party who has itself defaulted, or whose {{{{{1}}}|Credit Support Provider}} or {{{{{1}}}|Specified Entity}} has committed an act which amounts to an {{{{{1}}}|Event of Default}} for that counterparty to this ISDA Master Agreement. I know, I know, this doesn’t seem that big of a deal: this sort of thing that should be plain, obvious and go without saying — but it saves you a job when, in your peregrinations round the party’s {{{{{1}}}|Confirmation}}, you come to talk of pending {{{{{1}}}|Events of Default}} and {{{{{1}}}|Termination Event}}s against that party.

Instead of saying, laboriously, “if there is an {{{{{1}}}|Event of Default}} or {{{{{1}}}|Termination Event}} with respect to a party or its {{{{{1}}}|Credit Support Provider}}s or {{{{{1}}}|Specified Entities}}, as the case may be” you can speak of a {{{{{1}}}|Defaulting Party}} or an {{{{{1}}}|Affected Party}}.

Of course, it would be nice if there was a catch-all for a party who has committed an {{{{{1}}}|Event of Default}} or suffered a {{{{{1}}}|Termination Event}}, so you didn’t need to go “{{{{{1}}}|Defaulting Party}} or {{{{{1}}}|Affected Party}}, as the case may be” — cheekily we suggest “{{{{{1}}}|Innocent Party}}” and “{{{{{1}}}|Implicated Party}}” (“Guilty Party”, though fun, isn’t quite right, seeing as {{{{{1}}}|Termination Event}}s aren’t meant to impute any kind of culpability).

Non-defaulting Party

To be compared with - well, {{{{{1}}}|Defaulting Party}}. Of all things. And {{{{{1}}}|Non-affected Party}}, as well. The difference between a {{{{{1}}}|Non-defaulting Party}} and a {{{{{1}}}|Non-affected Party}}, and the linguistic torture that distinction as inflicted on the race of ISDA lawyers ever since, says everything you need to know about the absurdity of modern commercial law.

  • Do say: “the {{{{{1}}}|Non-defaulting Party}} or {{{{{1}}}|the non-Affected Party}}, as the case may be” over and over again.
  • Don’t say: “Is there really no other way you could get across this concept, for crying out loud?”

Affected Party and Non-Affected Party

The {{{{{1}}}|Affected Party}} is the one who is subject to a Section {{{{{1}}}|5(b)}} {{{{{1}}}|Termination Event}}, as opposed to the perpetrator of a Section {{{{{1}}}|5(a)}} {{{{{1}}}|Event of Default}} — thus one of a marginally less opprobrious character, seeing as {{{{{1}}}|Termination Event}}s are generally not considered to be one’s fault as such, but just regrettable things that happen that no-one expected, or wanted, but bring what was once a beautiful relationship to an end.

It’s not you, it’s — well, it’s not me either — it’s just that confounded tax event that occurred upon your recent merger.

Note that, in its wisdom, ISDA’s crack drafting squad™ chose not to have a generic term for the sort of person who is subject to either a {{{{{1}}}|Termination Event}} or an {{{{{1}}}|Event of Default}}, so there is much “{{{{{1}}}|Defaulting Party}} and/or {{{{{1}}}|Affected Party}}, as the case may be” sort of malarkey. This depresses we prose stylists, but ISDA’s crack drafting squad™ has never cared about us, so we should hardly be surprised.

Practical differences between “Affected Party” and “Defaulting Party”

What is the practical, economic difference between being closed out on the same {{{{{1}}}|Transaction}} for an {{{{{1}}}|Event of Default}} and a {{{{{1}}}|Termination Event}}?

This is something that all ISDA ninjas know, or sort of intuit, in a sort of semi-conscious, buried-somewhere-deep-in-the-brain-stem kind of way, but they may mutter darkly and try to change the subject if you ask them to articulate it in simple English.

To be fair the topic might be chiefly of academic interest were it not for the unfortunate habit of the same “real world” event potentially comprising more than one variety of termination right. This leads to some laboured prioritisation in the ISDA, and sometimes some in the Schedule too. What if my {{{{{1}}}|Tax Event upon Merger}} is also a {{{{{1}}}|Credit Event Upon Merger}} and, for that matter, also a {{{{{1}}}|Force Majeure Event}}? That kind of question.

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