Template:M detail 2002 ISDA 5(a)(v)
Payment acceleration versus delivery acceleration — mini close-out
Upon a payment default under 5(a)(v)(1), only that particular transaction must be accelerated (it doesn’t require full close out of the relevant Master Agreement. But a delivery default under 5(a)(v)(3), is only triggered if the whole Master Agreement is closed out.
Why would that be? Oh! Yes, Stock loan ninja at the back, with your hand up!
- Stock loan ninja (for it is he): Sir! Sir! Please sir, is this to stop the mini-closeout of a single Loan under a 2010 GMSLA?
- The JC (beaming inscrutably): Yeeeees — Go on — ?
- SLN: Sir, please sir, settlement failures under a stock loan are often a function of market illiquidity (the asset to be delivered isn’t available) and aren’t necessarily indicative of credit deterioration, sir, so should not necessarily trigger a DUST under the ISDA. But this situation would never apply to a simple cash payment. On the other hand, if the whole 2010 GMSLA is closed out as a result of a delivery fail, you clearly are in a credit-stress situation.
- JC: Excellent!
What if I “jump the gun”?
Could a wrongfully submitted notice of default be treated as a repudiation/anticipatory breach by the “non-defaulting party” giving the other party at least the right to withhold payments on the basis that this would constitute a Potential Event of Default by the party submitting the notice? There’s not much law on point, but the starting point is “no” - it would simply be an ineffective notice. However, a non-payment on the basis of an ineffective notice would be impermissible and may itself amount to a Failure to Pay. But as to the mere dispatch of the notice itself, there is relatively recent case law[1] (albeit in the bond world) stating that an acceleration notice that is submitted wrongfully, i.e. when no actual event of default, is merely ineffective and does not give rise to a claim for breach of contract or damages from “defaulting party”. Clearly this has not been considered in context of ISDA per se (and may be nuances here that would lead to different result) but at it is a start.