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| {{isdaprov|Automatic Early Termination}} is an odd and misunderstood concept which exists in Section {{isdaprov|6(a)}} {{isdaprov|Right to Terminate Following Event of Default}} of the {{isdama}}. As is so much in the {{isdama}}, it’s all about '''[[Netting]]'''. Where a jurisdiction suspends terms of contracts in a period of formal insolvency, the idea is to have the ISDA break before that suspension kicks in — so close-out netting works. | | {{isda Automatic Early Termination summ|isdaprov}} |
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| {{isdaprov|AET}} is thus only triggered by ''certain'' events under the {{isdaprov|Bankruptcy}} [[Events of Default - ISDA Provision|event of default]] — formal bankruptcy procedures — and not by economic events that tend to indicate insolvency (such as an inability to pay debts as they fall due, [[technical insolvency]] or the exercise of security. Nor does it apply to other Events of Default.
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| [[Automatic early termination]] (“{{tag|AET}}”) protects in jurisdictions (e.g., [[Germany]] and [[Switzerland]]) where certain bankruptcy events would allow a [[liquidator]] to “[[cherry-pick]]” those {{isdaprov|transaction}}s it wishes to honour (those which are [[in-the-money]] to the [[defaulting party]]) and avoid those where the {{isdaprov|defaulting party}} is [[out-of-the-money]].
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| It is only really useful:
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| (1) to a regulated financial institution which <br>
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| (2) would incur a capital charge if it doesn’t have a [[netting opinion]]'', and <br>
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| (3) where it wouldn’t get that netting opinion for a particular counterparty without {{isdaprov|AET}} being switched on in its {{isdama}}. <br>
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| There are only few counterparty types where these conditions prevail: the German and Swiss corporates mentioned above, for example. There may be others, but not many, because AET is a good-old-days, regulators-really-are-dopey-if-they-fall-for-this kind of a tactic. I mean, ''really''? [[Deem]]ing your ISDA to have magically terminated, without anyone’s knowledge or action, the instant before that termination would become problematic as a result of your insolvency? Come ''on''. Is any sophisticated market really going to wear that? (No slight meant on Germany or Switzerland here: the “Teutonic” AET does not deliver netting where unequivocally it would otherwise be forbidden, but rather is buttress residual doubt about the effectiveness of netting during insolvency as a result of looseness in insolvency regulations that aren’t categorical that you ''can'' net. The view is generally it ''should'' be okay in insolvency, but there are just some freaky discretions which may make life awkward if used maliciously. This is not legal advice obviously.)
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