Template:Isda 6 summ

No general “no-fault” termination right under the ISDA

Unlike the 2010 GMSLA and many other — ahh, less sophisticated master agreements — the ISDA Master Agreement doesn’t have a general termination right of this sort at all. It is like one of those fancy fixie pushbikes that cost seven grand and don’t even have brakes. You can only terminate {{{{{1}}}|Transactions}}, not the master agreement construct which sits around them. The empty vessel of a closed-out ISDA thus remains for all eternity as an immortal, ineffectual husk. This is to do with paranoid fears about the efficacy of the ISDA’s sainted close-out netting terms if you do terminate the agreement — meh; maybe — but I like to think it is because, before he was cast out from heaven, the Dark Lord made plans to unleash his retributive fury upon the world through a sleeping army of wight-walker zombie ISDAs, doomed to roam the earth until the day of judgment, apropos nothing but there, not alive, but un-dead, ready to reanimate and rally to the Dark Lord’s banner and rain apocalyptic hell on we errant descendants of the Good Man, who did not heed His warnings of financial weapons of mass destruction.

How the close-out mechanism works

It’s optional ...: An {{{{{1}}}|Event of Default}} gives the “{{{{{1}}}|Non-defaulting Party}}” a right (but not an obligation) to designate an {{{{{1}}}|Early Termination Date}} with respect to all outstanding {{{{{1}}}|Transactions}} on not more than 20 days’ notice.

... Unless AET applies: Where {{{{{1}}}|Automatic Early Termination}} applies to a party (being jurisdiction-dependent, it often will only apply to one party) the {{{{{1}}}|Non-defaulting Party}} loses its optionality should the {{{{{1}}}|Event of Default}} be {{{{{1}}}|Bankruptcy}}: all Transactions automatically terminate whehter you want them to or not, and whether you realise it or not. This is plainly sub-optimal from a {{{{{1}}}|Non-defaulting Party}}'s perspective. You should therefore only switch on AET if you are sure you need it (e.g. for counterparties in jurisdictions where close-out netting may fail in an insolvency, but not before). Being sure generally means “having a netting opinion telling you netting does not work without it.” In other words, AET is one provision you should not insist on just because the other party insists upon it against you).

Not triggering an Event of Default can be controversial: For what this optionality not to terminate means, and how controversial it can be, see the commentary to Section {{{{{1}}}|2(a)(iii)}}.

Once all {{{{{1}}}|Transactions}} are terminated, you move to Section {{{{{1}}}|6(e)}} which directs how to value the {{{{{1}}}|Transactions}} (it depends on who is the Defaulting Party, and whether you have elected {{{{{1}}}|Loss}} or {{{{{1}}}|Market Quotation}}, and {{{{{1}}}|First Method}} or {{{{{1}}}|Second Method}}. Under the 2002 ISDA it is much easier.