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Russia, Sanctions and the ISDA Master Agreement

On 23 April 2014 ISDA, in conjunction with A&O, discussed some of the potential effects that financial sanctions and trade limitations may have on transactions with Russian or Ukranian counterparties documented using either the ISDA 1992 or 2002 Master Agreements.  In brief, the main issued addressed during the call were as follows:


There is a significant difference in the treatment of the Illegality Termination Event between the 1992 and 2002 ISDA Master Agreements.  Both potentially allow for termination of transactions in the event that it becomes illegal to make or receive a payment as a result of a counterparty being subject to sanctions.  However, in order to rely on the clause, there must be a change which creates the illegality after the execution of the relevant transactions.  In addition, the 1992 Master Agreement imposes the obligation on the Affected Party to attempt to transfer the Affected Transactions to an Affiliate not affected by the Illegality Event whereas the 2002 ISDA Master Agreement does away with this requirement.  Furthermore, the 2002 version allows the Affected Party to terminate some but not all of the transactions while the 1992 version forces the termination of all Affected Transactions.  If the fact pattern does not fit the Illegality clause, a party may have to fall back on the law of frustration of contract, which is far from ideal.

Force Majeure Event

Force Majeure Events are typically only addressed by the 2002 ISDA Master Agreement.  While the non-Affected Party has a right to determine the termination amount, it is required to do so using mid-market prices and without further adjustment in respect of the creditworthiness of either party.  Importantly, if an Affected Party is unable to effect payment by reason of a Force Majeure Event then such failure to pay shall not be treated as a “failure to pay” Event of Default.


In the event that a particular set of facts could constitute either an Illegality/Impossibility/Force Majeure Event or an Event of Default, it will be deemed to constitute an Illegality/Impossibility/Force Majeure Event. What this helpful provision of the 1992 ISDA Master Agreement lacks in precision was corrected by the 2002 ISDA Master Agreement with distinguishes between performance default (which takes precedence over the Event of Default) and insolvency default (which does not).

Finally an interesting question raised in the call, which as of yet has no answer, is whether the simple act of netting exposures could make a firm fall foul of certain sanctions, in that the reduction of exposure could be regarded as a form of ‘payment’ to a sanctioned counterparty with respect to out-of-the-money transactions.


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