Template:M summ 2002 ISDA 1

Much of this comes from the “goes without saying, but we’ll say it anyway” dept — which is a large department indeed, in the annals of modern legal practice. But not the Single Agreement part. That’s important — by some lights the main reason one even has an ISDA Master Agreement: it is the Section which vouchsafes your cloe-out netting analysis: it purports to inextricably bind together all Transactions under the ISDA Master Agreement as part of a single, concerted, nettable whole. Should (God forbid) your counterparty have imploded, an unthinking administrator might think the three-year jet fuel swap you traded in July 2012 had nothing really to do with the six-month interest rate swap you put on in February last year, and the two should be treated as separate, unitary transactions. It might think this quite enthusiastically, if one of those transactions happens out-of-the-money to you, and the other one in-the-money. “Why, that’s dashed bad luck, old man! You have to pay me that out-of-the-money exposure and while this dead parrot owes you on the other trade, the end of the creditors’ queue is that one you can see over there in the far distance, should you have a telescope on you.”

You might be inclined to say, but wait: we should be able to set these off surely! This is all the same stuff, right! Swaps! They all go together! They’re not unitary transactions at all!

Well, Section 1(c) is your friend in making that argument. There are similar attempts in other agreements, but none is so classic and elegant as the ISDA Master Agreement’s

You see the same thing in the Template:Gtma, for that matter.

DO NOT ADJUST THIS PROVISION. And, any way why would you?

Assignment and its effect on Netting and Set-off

Could a right to assign by way of security upset close-out netting such that one should forbid parties making assignments by way of security of their rights under a master netting agreement (such as an ISDA Master Agreement or a 2010 GMSLA), for fear of undermining your carefully organised netting opinions?

Generally: No.

• An assignment by way of security is a preferred claim in the assignor’s insolvency over the realised value of certain rights the assignor holds against its counterparty. It is not a direct transfer of those rights to an assignee: the counterparty is still obliged to the assignor, not the assignee, and any claim the assignee would have against the counterparty would only be by way of subrogation of the assignor’s claim, should the assignor have imploded in the meantime or something.
• “Nemo dat quod non habet”: the unaffected counterparty’s rights cannot be improved (or worsened) by assignment and, it being a single agreement, on termination of the agreement the assignee’s claim is to the termination amount determined under the Agreement, which involves terminating all transactions and determining the aggregate mark-to-market and applying close-out netting. No one can give what they do not have.
• The assignee can be in no better position than the assignor and this takes subject to any set-off. The conduct of the debtor vis a vis the assignee is irrelevant, unless it gives rise to an estoppel. See Bibby Factors Northwest Ltd v HFD Ltd (paragraphs 38 and 48).

At the point of closeout, the assignee’s right is to any termination payment payable to the Counterparty. Therefore any assignment of rights is logically subject to the netting, as opposed to potentially destructive of it.

But: This is only true insofar as your netting agreement does not actively do something crazy, like disapplying netting of receivables which have been subject to an assignment and dividing these amounts off as "excluded termination amounts not subject to netting".

I know what you are thinking. "But why on God’s green earth would anyone do that?" This is a question you might pose to the FIA’s crack drafting squad™, who confabulated the FIA’s Professional Client Agreement, which does exactly that.

See also

• Long form confirmation
• Single Agreement - GTMA Provision