Template:M comp disc 1992 ISDA 5

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These are the events that entitle you to close out some or all of your Transactions; to find out what hideous rigmarole you must go through when you have decided to do that, proceed directly to Section 6.

Section 5(a)

5(a)(i): The significant change between 1992 ISDA and 2002 ISDA is the restriction of that grace period from three Local Business Days to one. And a bit of convolutional frippery in introducing Local Delivery Days as well.

Compare also Failure to Pay under the 2014 ISDA Credit Derivatives Definitions, which is subtly different given the different purpose that it plays under a CDS.
5(a)(ii): Note the addition of Repudiation of Agreement to the 2002 ISDA. Common law purists like the JC will grumble that you don’t really need to set out repudiation as a breach justifying termination of a contract, because that’s what it is by definition but stating the bleeding obvious has never stopped ISDA’s crack drafting squad™ before. Also, an interesting question: if you do feel the need to provide for what is in essence an evolving common law remedy, then, to the extent your draw that remedy inside the cope of the common law remedy — or the common law evolves some new different and remedy that no-one had thought of before — then what? Section 9(d) has you covered. Woo-hoo.
5(a)(iii): A bit of pedantic flannel found its way into the 2002 ISDA — it captures not just the failure of the Credit Support Document itself, but any security interest granted under it, catering to the legal eagle’s most paranoid fears that a contractual right can have some sort of distinct ontological existence independently from the agreement which gives it breath and enforceable currency in the first place. But otherwise the same.
5(a)(iv): No change between 1992 ISDA and 2002 ISDA.
5(a)(v): DUST has been expanded in five significant ways by the 2002 ISDA. See the summary and general sections for details.
5(a)(vi): The 2002 ISDA updates the 1992 ISDA’s Cross Default so that if the combined amount outstanding under the two limbs of Cross Default exceed the Threshold Amount, then it will be an Event of Default. Normally, under the 1992 ISDA, Cross Default requires one or the other limbs to be satisfied — you can’t add them together. This was a bit of a snafu.

The two limbs are:

  1. a default under a financial agreement that would allow a creditor to accelerate any indebtedness that party owes it;
  2. a failure to pay on the due date under such agreements after the expiry of a grace period.

5(a)(vii): There are two differences between the 1992 ISDA and 2002 ISDA definitions of Bankruptcy.

First, the 2002 ISDA has a slightly more specific concept of “insolvency”. In limb 4 (insolvency proceedings) a new limb has been included to cover action taken by an entity-specific regulator or supervisor (as opposed to a common or garden insolvency proceeding): If initiated by a regulator, the game’s up as soon as the action is taken. If initiated by a random creditor, the action must have resulted in a winding-up order, or at least not have been discharged in 15 (not 30) days.

About that grace period. Second, and unnervingly for those of little faith in their own accounts payble departments, the grace period in which one must arrange the dismissal of a vexations or undeserving insolvency petition (under 5(a)(vii)(4)) or the exercise of security over assets (under 5(a)(vii)(7)) is compressed from 30 days to 15 days.
5(a)(viii): ISDA’s crack drafting squad™ giveth and ISDA’s crack drafting squad™ taketh away. As it neatly excises one square of flannel here, it inserts another one, further itemising ways in which a company might reorganise itself, there. In practical terms — ones that might make a difference were they to be considered by the King’s Bench Division, that is — no real change between 1992 ISDA and 2002 ISDA.

Section 5(b)
Renumbering due to new Force Majeure Event

Since the 2002 ISDA includes a Force Majeure Event, using language that was already agreed and widely inserted into the 1992 ISDA Schedule before its publication. Because this was entered as Section 5(b)(ii) — I mean, honestly, could they have not made it Section 5(b)(vi), so all the other clause references could stay the same? You have no idea what conceptual problems this has created for the poor JC trying to efficiently organise this website.

Clause-by-clause

5(b)(i): Illegality: Quite a lot of formal change to the definition of Illegality; not clear how much of it makes all that much practical difference. The 2002 ISDA requires you to give effect to remedies or fallbacks in the Confirmation that might take you out of Illegality before evoking this provision — which ought to go without saying. It also carves out Illegalities caused by the action of either party, which also seems a bit fussy, and throws in some including-without-limitation stuff which, definitely is a bit fussy. Lastly, the 2002 ISDA clarifies that the party suffering the Illegality is the Affected Party, and that an Illegality applies to the non-receipt of payments just as much as to their non-payment. Again, all this ought to have been true the 1992 ISDA — no doubt there is some whacky litigation that said otherwise — so this is mainly in the service of avoiding doubt.
5(b)(ii): Force Majeure Event: There is no Force Majeure in the 1992 ISDA, though parties would habitually negotiate one in, and by the time the 2002 ISDA was published it was in fairly standardised. For those who didn’t negotiate it in there was also the ISDA Illegality/Force Majeure Protocol (see here) which they could sign — upon payment of the suitable fee is ISDA — to adopt/incorporate the relevant parts.
5(b)(iii): Tax Event: Other than the renumbering, no real change in the definition of Tax Event 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.
5(b)(iv): Tax Event Upon Merger: Note the missing “indemnifiable” from the fifth line of the 2002 ISDA version and the expanded description of “merger events” towards the end of the clause. And the renumbering as a result of the Force Majeure Event clause in the 2002 ISDA.
5(b)(v): Credit Event Upon Merger: The 2002 ISDA introduced the concept of the “Designated Event”, which was an attempt to define more forensically the sorts of corporate events that should be covered by CEUM. They are notoriously difficult to pin down. Even before the 2002 ISDA was published, it was common to upgrade the 1992 ISDA formulation to something resembling the glorious concoction that became Section 5(b)(v) of the 2002 ISDA. The 1992 wording is a bit lame. On the other hand, you could count the number of times an ISDA Master Agreement is closed out purely on account of Credit Event Upon Merger on the fingers of one hand, even if you had lost all the fingers on that hand to an industrial accident. So — yeah.
5(b)(vi): Additional Termination Events: Other than the numbering discrepancy and a daring change of a “shall” to a “will”, Section 5(b)(vi) of the 2002 ISDA is the same as Section 5(b)(v) of the 1992 ISDA. That said, ATEs are likely to be the most haggled-over part of your ISDA Master Agreement.

Section 5(c)

A simple piddling match between Events of Default and Illegality in the 1992 ISDA makes way for a full-blown hierarchy of competing circumstances justifying closeout of the ISDA Master Agreement in the 2002 ISDA.

Section 5(d)

There is no equivalent provision to Section 5(d) in the 1992 ISDA, seeing as it does not contain a Force Majeure Event at all, and its conception of Illegality is far less — how shall we say? — sophisticated than the one in the 2002 ISDA.