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ISDA Close-out Framework

Emma Bibby and Alejandro Birsan, our DRS summer interns in 2024, have written a blog post on the ISDA Close-out Framework published by ISDA on 27 June 2024


Because of regulatory requirements implemented as a consequence of the financial crisis in 2008, the world of collateralised OTC derivative contracts became more complex in the recent years. The International Swaps and Derivatives Association Inc. (ISDA) has now released a Close-out Framework which provides a high-level decision-tree- analysis. Market participants can use it to establish or review their internal default processes with stakeholders, internal and external advisers, and service provider.

Why did ISDA publish the Close-out Framework?

Market participants have expressed that the close-out of OTC derivative transactions became more complex since the introduction of regulatory regimes. Variation margin, Initial margin, but also stay regimes as part of various banking resolution regimes were introduced post 2008. This complexity may hinder companies from responding quickly and effectively as last year’s insolvencies of the US-based Signature Bank and Silicon Valley Bank, but also the almost collapse of Zurich-based Credit Suisse and its subsequent acquisition by UBS, have shown.

What ISDA Master Agreement versions are in-scope?

The new Close-out Framework applies primarily to the 2002 ISDA Master Agreement. If market participants want to use it for the 1992 version, they should keep in mind the differences between both versions. In any case, market participants should familiarise themselves with the underlying assumptions ISDA has made when they created the decision tree.

What scenarios are covered?

In the Close-out Framework market participants are guided through the following 3 scenarios:

  • Default under the ISDA Master Agreement
  • Return of collateral and
  • Collateral enforcement with special focus on segregated IM collateral.

Default under the ISDA Master Agreement includes not only the two main Events of Default (failure to pay and insolvency), but also notices and the application of statutory and contractual stay regimes.

What format is available for the Close-out Framework?

The Close-out Framework is available as an interactive online version.

ISDA has provided guidance to its members on how to use the interactive version. Models will appear as the user chooses their actions to offer extra legal information and advice on the next steps that need to be taken. Throughout the flowchart there is also additional links to documents, for further guidance. It also offers an export functionality, so that example close-out procedures can be shared with others.

How can Market participants access the Close-out Framework?

Currently the interactive online version of the ISDA Close-out Framework cannot be found on the ISDA website but can be accessed via this Further information published by ISDA can be found on ISDA website.

Does it provide a full picture of all possible scenarios?

No. It provides a high-level guidance only. Some topics are not (yet) included, such as pre-planning actions that go into the close-out or automatic transfers of collateral. However, when ISDA introduced the Close-out Framework to its members, it became clear that it is welcoming feedback not only to the ISDA Close-out Framework, but also to members’ experience with close-out procedures and events in general.

Could the Close-out Framework be used in an actual default?

No. The Close-out Framework should be seen as a support for discussions on default processes, whether it is about setting up new default processes or revisiting existing processes. It is not designed to replace the analysis required in case of an actual close-out event.

The OTC derivatives world became more complex in the recent years – mandatory margining, segregation requirements and stay regimes created another layer to consider in default situations. The ISDA Close-out Framework provides an excellent tool for market participants to start, or revisit talks with their stakeholders and service providers on internal default processes.

It also serves as a good reminder to revisit internal default processes from time to time.

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