Template:M detail 2002 ISDA Affected Party

In the heyday of ISDA negotiation just who was the Affected Party and how one should value and terminate an Affected Transaction used to be much more of a source of controversy than it is today.

This might be a function of the market’s general move to the 2002 ISDA closeout methodology, being far less fraught and bamboozling then the one in the 1992 ISDA, refraining as it does from absurdities like the First Method and alternative Market and Loss methods of valuing replacement transactions. Even those who insist on staying with the 1992 ISDA — Hello, Cleveland! — are often persuaded to upgrade the closeout methodology.

It might also be that the specific expertise as to what happens in a close out has dissipated over the years as banks have outsourced and downskilled their negotiation functions.

But the JC likes to think that in this mature market, the commercial imperative plays a part here. Termination Events come in two types: catastrophic ones, which signal the end of the relationship — and usually the ongoing viability of one of the counterparties — altogether; and and Transaction-specific ones, which no-one intended or wanted, everyone regrets, but which will soon be water under the bridge, for parties who will continue to trade new derivatives into glorious, golden perpetuity.

Now any swap dealer who who regards a Transaction-specific Termination Event as an opportunity to gouge its counterparty can expect a frosty reception next time its salespeople are pitching new trading axes to the CIO.

On the other hand if, when your valuation reaches her, the CIO is wandering around outside her building with an Iron Mountain box, she will be less bothered about about the wantonness of your termination mark — it being no longer her problem — and to the extent she does care about it all, will console herself with the reality that you are not likely to see much of that money anyway once her former employer’s insolvency estate has been wound up.