Termination Event - ISDA Provision
2002 ISDA Master Agreement
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Termination Event in all its glory
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A Termination Event is an event justifying one party unilaterally terminating a Transaction — or sometimes all Transactions — but that is generally of a nature that does not cast aspersions of impropriety on the other, or “Affected”, party. This makes a difference when it comes to how one calculates the Close-out Amount for the Transaction in question.
The practical difference between an “Affected Party” and a “Defaulting Party”
This is something that all ISDA ninjas know, or sort of intuit, in a sort of semi-conscious, buried-somewhere-deep-in-the-brain-stem kind of way, but they may mutter darkly and try to change the subject if you ask them to articulate it in simple English.
To be fair the topic might be chiefly of academic interest were it not for the unfortunate habit of the same “real world” event potentially comprising more than one variety of termination right. This leads to some laboured prioritisation in the ISDA, and sometimes some in the Schedule too. What if my Tax Event upon Merger is also a Credit Event Upon Merger and, for that matter, also a Force Majeure Event? That kind of question.
A trap for Cinderella
If, instead of being expressed as an “Additional Termination Event”, which is how the ISDA Mechanism is intended to operate, it is set out as a new “5(b)(vii)” it is not designated therefore as any of an “Illegality”, “Tax Event”, “Tax Event Upon Merger”, “Credit Event Upon Merger” or “Additional Termination Event”, so therefore, read literally, is not caught by the definition of “Termination Event” and none of the Termination provisions bite on it.
I mention this because we have seen it happen. You can take a “fair, large and liberal view" that what the parties intended was to create an ATE, but why suffer that anxiety?
- The JC’s famous Nutshell™ summary of this clause