Termination Events - ISDA Provision

2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™ Resources and navigation Resources Wikitext | Nutshell wikitext | 1992 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA | JC’s ISDA code project Navigation Preamble | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 Events of Default: 5(a)(i) Failure to Pay or Deliver • 5(a)(ii) Breach of Agreement • 5(a)(iii) Credit Support Default • 5(a)(iv) Misrepresentation • 5(a)(v) Default Under Specified Transaction • 5(a)(vi) Cross Default • 5(a)(vii) Bankruptcy • 5(a)(viii) Merger without Assumption • Termination Events: 5(b)(i) Illegality • 5(b)(ii) Force Majeure Event • 5(b)(iii) Tax Event • 5(b)(iv) Tax Event Upon Merger • 5(b)(v) Credit Event Upon Merger • 5(b)(vi) Additional Termination Event Index: Click ᐅ to expand: ► 2002 ISDA ► 1992 ISDA Section 5(b) in a Nutshell™ Use at your own risk, campers! 5(b) Termination Events The events below occur to a party or its Credit Support Provider or Specified Entity (subject to Section 5(c)) it will be an Illegality (5(b)(i)); a Force Majeure Event (5(b)(ii)), a Tax Event (5(b)(iii)), a Tax Event Upon Merger (5(b)(iv)) and Credit Event Upon Merger (5(b)(v)): 5(b)(i) Illegality. Taking account of any fallbacks and remedies in the Transaction, for reasons beyond the Affected Party’s control, (not counting a lack of authorisation required under Section 4(b)), it would be illegal in any relevant jurisdiction to comply with any material term of a Transaction or Credit Support Document. 5(b)(ii) Force Majeure Event. A force majeure occurring after any Transaction is executed means:― (1) the Affected Party’s relevant Office cannot practicably perform any obligation under the Transaction; or (2) the Affected Party or its Credit Support Provider cannot practicably perform any obligation under the Transaction; if the force majeure is outside the Affected Party’s control and it could not, using all reasonable efforts (without incurring more than incidental expenses by way of loss), overcome the necessary prevention; 5(b)(iii) Tax Event It will be a Termination Event when, following a change in tax law or practice after any trade date, an Affected Party is likely to have to either: (1) Gross up an Indemnifiable Tax deduction (other than for interest under Section 9(h)); or (2) receive a payment net of Tax which the Non-Affected Party is not required to gross up (other than where it is caused by the Non-Affected Party’s own omission or breach). 5(b)(iv) Tax Event Upon Merger. A party (the “Burdened Party”) on the next Scheduled Settlement Date will have to: (1) Gross up an Indemnifiable Tax deduction (other than for interest under Section 9(h)); or (2) receive payments net of Tax which are not required to be grossed up (other than where that is caused by the Non-Affected Party’s own omission or breach); because a party has merged with, transferred substantially all of its assets into, or reorganised itself as, another entity (the Affected Party) where that does not amount to a Merger Without Assumption; 5(b)(v) Credit Event Upon Merger. If “Credit Event Upon Merger” applies and it or any of its Credit Support Providers or Specified Entities suffers a Designated Event (which is not a Merger Without Assumption) and the relevant entity’s (which will be the Affected Party) creditworthiness is materially weaker as a result. A “Designated Event” means that the relevant entity:― (1) merges with, or transfers substantially all of its assets into, or reorganises itself as another entity; (2) comes under the effective voting control of another entity; or (3) makes a substantial change in its capital structure by issuing or guaranteeing debt, equities or analogous interests, or securities convertible into them; 5(b)(vi) Additional Termination Event. If any “Additional Termination Event” is specified, the occurrence of that event (where the Affected Party will be as specified in the Confirmation or Schedule). view template Full text of Section 5(b) 5(b) Termination Events. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes (subject to Section 5(c)) an Illegality if the event is specified in clause (i) below, a Force Majeure Event if the event is specified in clause (ii) below, a Tax Event if the event is specified in clause (iii) below, a Tax Event Upon Merger if the event is specified in clause (iv) below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to clause 5(b)(v) below: 5(b)(i) Illegality. After giving effect to any applicable provision, disruption fallback or remedy specified in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement, due to an event or circumstance (other than any action taken by a party or, if applicable, any Credit Support Provider of such party) occurring after a Transaction is entered into, it becomes unlawful under any applicable law (including without limitation the laws of any country in which payment, delivery or compliance is required by either party or any Credit Support Provider, as the case may be), on any day, or it would be unlawful if the relevant payment, delivery or compliance were required on that day (in each case, other than as a result of a breach by the party of Section 4(b)):― 5(b)(i)(1) for the Office through which such party (which will be the Affected Party) makes and receives payments or deliveries with respect to such Transaction to perform any absolute or contingent obligation to make a payment or delivery in respect of such Transaction, to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or 5(b)(i)(2) for such party or any Credit Support Provider of such party (which will be the Affected Party) to perform any absolute or contingent obligation to make a payment or delivery which such party or Credit Support Provider has under any Credit Support Document relating to such Transaction, to receive a payment or delivery under such Credit Support Document or to comply with any other material provision of such Credit Support Document; 5(b)(ii) Force Majeure Event. After giving effect to any applicable provision, disruption fallback or remedy specified in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement, by reason of force majeure or act of state occurring after a Transaction is entered into, on any day:― 5(b)(ii)(1) the Office through which such party (which will be the Affected Party) makes and receives payments or deliveries with respect to such Transaction is prevented from performing any absolute or contingent obligation to make a payment or delivery in respect of such Transaction, from receiving a payment or delivery in respect of such Transaction or from complying with any other material provision of this Agreement relating to such Transaction (or would be so prevented if such payment, delivery or compliance were required on that day), or it becomes impossible or impracticable for such Office so to perform, receive or comply (or it would be impossible or impracticable for such Office so to perform, receive or comply if such payment, delivery or compliance were required on that day); or 5(b)(ii)(2) such party or any Credit Support Provider of such party (which will be the Affected Party) is prevented from performing any absolute or contingent obligation to make a payment or delivery which such party or Credit Support Provider has under any Credit Support Document relating to such Transaction, from receiving a payment or delivery under such Credit Support Document or from complying with any other material provision of such Credit Support Document (or would be so prevented if such payment, delivery or compliance were required on that day), or it becomes impossible or impracticable for such party or Credit Support Provider so to perform, receive or comply (or it would be impossible or impracticable for such party or Credit Support Provider so to perform, receive or comply if such payment, delivery or compliance were required on that day), so long as the force majeure or act of state is beyond the control of such Office, such party or such Credit Support Provider, as appropriate, and such Office, party or Credit Support Provider could not, after using all reasonable efforts (which will not require such party or Credit Support Provider to incur a loss, other than immaterial, incidental expenses), overcome such prevention, impossibility or impracticability; 5(b)(iii) Tax Event. Due to (1) any action taken by a taxing authority, or brought in a court of competent jurisdiction, after a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (2) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Settlement Date (A) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 9(h)) or (B) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 9(h)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B)); The line breaks are for comprehension and do not appear in the original 5(b)(iv) Tax Event Upon Merger. The party (the “Burdened Party”) on the next succeeding Scheduled Settlement Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 9(h)) or (2) receive a payment from which an amount has been deducted or withheld for or on account of any Tax in respect of which the other party is not required to pay an additional amount (other than by reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a party consolidating or amalgamating with, or merging with or into, or transferring all or substantially all its assets (or any substantial part of the assets comprising the business conducted by it as of the date of this Master Agreement) to, or reorganising, reincorporating or reconstituting into or as, another entity (which will be the Affected Party) where such action does not constitute a Merger Without Assumption; 5(b)(v) Credit Event Upon Merger. If “Credit Event Upon Merger” is specified in the Schedule as applying to the party, a Designated Event (as defined below) occurs with respect to such party, any Credit Support Provider of such party or any applicable Specified Entity of such party (in each case, “X”) and such Designated Event does not constitute a Merger Without Assumption, and the creditworthiness of X or, if applicable, the successor, surviving or transferee entity of X, after taking into account any applicable Credit Support Document, is materially weaker immediately after the occurrence of such Designated Event than that of X immediately prior to the occurrence of such Designated Event (and, in any such event, such party or its successor, surviving or transferee entity, as appropriate, will be the Affected Party). A “Designated Event” with respect to X means that:― (1) X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets (or any substantial part of the assets comprising the business conducted by X as of the date of this ISDA Master Agreement) to, or reorganises, reincorporates or reconstitutes into or as, another entity; (2) any person, related group of persons or entity acquires directly or indirectly the beneficial ownership of (A) equity securities having the power to elect a majority of the board of directors (or its equivalent) of X or (B) any other ownership interest enabling it to exercise control of X; or (3) X effects any substantial change in its capital structure by means of the issuance, incurrence or guarantee of debt or the issuance of (A) preferred stock or other securities convertible into or exchangeable for debt or preferred stock or (B) in the case of entities other than corporations, any other form of ownership interest; or 5(b)(vi) Additional Termination Event. If any “Additional Termination Event” is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties will be as specified for such Additional Termination Event in the Schedule or such Confirmation). view template Related agreements and comparisons Related Agreements Click here for the text of Section 5(b) in the 1992 ISDA Comparisons Click to compare this section in the 1992 ISDA and 2002 ISDA. Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

Content and comparisons

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Summary

Trick for young players: Force Majeure Event

Note that the 2002 ISDA includes a Force Majeure Event, using language that was already agreed and widely inserted into the 1992 ISDA Schedule prior to its publication. Because this was entered as Section 5(b)(ii), this necessitates some numbering differences between the two versions of the ISDA Master Agreement — a drafting trick for young players to watch out for.

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General discussion

Events of Default vs. Termination Events: Showdown

Puzzled ISDA ingénues may wonder why there are Events of Default and Termination Events under the, er, eye-ess-dee-aye. In any weather, there seem to be rather a lot of them. And there is a third, hidden category: Additional Termination Events that the parties crowbar into the Schedule.

Do we really need all these, and what is the difference?

• Events of Default tend to imply fault, turpitude, moral outrage, and are comprehensive — some would say overcomprehensive — Failure to Pay; Breach; Credit Support Default; Misrepresentation; Bankruptcy and — here we’re well and truly in over-comprehensive territory — Cross Default.
• Termination Events tend to be unwanted vicissitudes of commercial life which neither party could anticipate, and are often Transaction-specific — Illegality, Force Majeure; Tax Events.
• Just in case you are worried ISDA’s crack drafting squad™, with the collective weight of the whole derivatives industry urging it on, might have forgotten something important over 30 years of the ISDA Master Agreement you can make up your own ones. These are the “Additional Termination Events”: they are treated like Termination Events, but tend to be more (in terms of moral outrage) like Events of Default. You will spend many years of your life arguing about these, but they will never get used.

So, with feeling:

Events of Default...

• Naughtiness: Imply a degree of turpitude on the part of the TRANSGRESSOR. Termination Events are sort of gentler and fluffier (although ATEs are often quite turpitudinous);
• All or none: Exercising an Event of Default necessitates terminating all outstandingTransactions; invoking a Termination Event may only affect specific “Affected Transactions” (but again, ATEs are often both turpitudinous and (for that very reason) impact necessarily on all outstanding Transactions;
• Calculations: The Non-Defaulting Party always makes the termination calculations; in a Termination Event (if both parties are affected) they share it and split the difference;
• Default interest: The interest accrual rate for your Close-Out Amount is different (i.e., higher) following an Event of Default than following a Termination Event. Because — turpitude, right?

Termination Events ...

• Notice: oblige the Affected Party to fess up about them — a fair expectation, since the Affected Party hasn’t been actively turpitudinous in the Termination Event coming about and can be still expected to act in good faith; Events of Default generally don’t, for the same reason: Dude has materially breached your contract. What skin is it off dude’s nose to further breach it, by not owning up?
• Some Termination Events only arise only once the Affected Party has failed to transfer obligations away to a party who wouldn’t be an Affected Party.
• Potential number of Affected Parties: Most Termination Events, at least in theory, can be suffered by both parties simultaneously. Credit Event Upon Merger is the exception — well I guess both parties could contemporaneously merge with materially crappier credits: who knows? — and the stentorian in me feels that — it being plainly credit-related, if it were necessary to include at all — it would not have hurt to put Credit Event Upon Merger and Additional Termination Events — which are typically all credit-related — in the Events of Default bucket.

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See also

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