Breaking the ISDA Section 2(a)(iii) Insolvency Stalemate

On 19 June 2014, the International Swaps and Derivatives Association (“ISDA”) published an amendment to the ISDA Master Agreement for use in relation to section 2(a)(iii) of that agreement, for parties who wish to amend their ISDA Master Agreements to insert a time limit on the operation of that provision in circumstances where an event of default has occurred in relation to one of the parties.

The Background -

For over 20 years now it has been market practice, for OTC derivatives trades governed by an ISDA Master Agreement, that following your counterparty’s default, you do not have to perform any payment or delivery obligations until that default is cured. The essential rationale behind this concept is that the non-defaulting party, although it has the right under the ISDA Master Agreement to bring about an early termination of all transactions under the ISDA Master Agreement as a result of such default, may have legitimate reasons for not rushing into such a decision. It may instead wish to carefully monitor the situation, particularly if there is a prospect of a cure, before taking such a final decision. Nevertheless, the understanding has long been that, for so long as the counterparty remains in default, the non-defaulting party should not be required to deliver assets or pay money to the defaulting party, given that it has a limited expectation of the defaulting party ever complying with its obligations.

Please see full publication below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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