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ISDA Master Agreement: First Peek at Section 2(a)(iii) Amendments – No Protocol Spotted Yet

On 31 January 2014, ISDA published a draft of a new Section 6(g) to the 2002 ISDA Master Agreement – a clause that counterparties can use to bilaterally amend the operation of the conditions precedent to be found within Section 2(a)(iii).  Together with the BCBS/IOSCO margin rules for non-cleared derivatives, suspension of termination rights for the purposes of living wills legislation, and standardisation of Credit Support Annexes, this is yet another item to add to the list of amendments for those that manage portfolios of derivative documentation.  In summary, the clause details the amendments set out below.

If an Event of Default has occurred the Defaulting Party may, by serving a notice on the Non-defaulting Party, invoke a 90-day hard stop on the automatic suspension of the Non-defaulting Party’s obligations pursuant to section 2(a)(iii).  As such, at the end of the 90-day period, the Non-defaulting Party’s obligations to pay or deliver will effectively be re-ignited.  This addresses the problems experienced during the financial crisis of Non-defaulting Party’s simply choosing to sit on their hands rather than crystallise a loss with a Defaulting Party.

If a Potential Event of Default has occurred the Defaulting Party, by serving a notice on the Non-defaulting Party, can effectively convert that Potential Event of default into an (actual) Event of Default.  The Defaulting Party can then invoke the 90-day hard stop on section 2(a)(iii) which applies to Events of Default.

If a different Event of Default subsequently occurs, then any ‘ticking’ hard stop with respect to an earlier Event of Default will cease to apply, unless that earlier Event of Default related to Bankruptcy under Section 5(a)(vii).  Of course, the Defaulting Party retains the right to invoke a new hard stop with respect to the more recent Event of Default.

The 90-day period is actually in square brackets in the draft of the clause, and so may be up for negotiation between parties.  However, ISDA warns those that might look to agree a different time period that the FCA has indicated that it regards a 90-day period as acceptable and expect this time limit to apply generally.

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