GMRA A-Z: Automatic Early Termination

Normally, under Paragraph 10(b) of the 2011 GMRA, if an Event of Default has occurred and is continuing, then the non-Defaulting Party may (by sending a notice to its counterparty) designate a day as an Early Termination Date in respect of all outstanding Transactions.  This has the effect of bringing forward the Repurchase Date with respect to all outstanding Transactions.

However, if the parties have specified that “Automatic Early Termination” applies then an Early Termination Date in respect of all outstanding Transactions will occur at the time immediately preceding the occurrence of the presentation of a winding-up petition, the appointment of a liquidator or any analogous act in relation to the Defaulting Party.  Obviously, because the termination is automatic in these circumstances, there is no need for the non-Defaulting party to serve any kind of notice to terminate.

This insolvency-related “Automatic Early Termination” mechanism is very similar to the mechanic which exists under the ISDA Master Agreement.  Broadly, its purpose is to protect against “cherry-picking” (the process whereby an insolvency practitioner enforces contracts which are profitable to the insolvent estate for which it acts whilst simultaneously repudiating contracts which are not profitable to the insolvent estate).  Automatic Early Termination also provides a tool whereby parties can avoid the risk associated with a non-defaulting (but out-of-the-money) counterparty simply ‘sitting on its hands’ in reliance on the flawed-asset provision within the GMRA, rather than terminating a transaction and therefore crystallising a payment due to an in-the-money (albeit defaulting) party.

Annex 1, Paragraph 1(m) of the 2011 GMRA allows the parties to specify whether “Automatic Early Termination” applies to Party A and/or Party B for the purposes of Paragraph 10(b).

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