Monday 11 November 2013

Common provisions negotiated in the ISDA Master Agreement: Part 8

Additional Termination Events

Section 5(b)(v) of the 1992 Agreement and Section 5(b)(vi) of the 2002 Agreement allow parties to state Additional Termination Events in Part 1(g) or (h) respectively of the Schedule or in any Confirmation between them. Any Affected Party or Affected Parties for those Additional Termination Events are also stated in those places.

It is assumed that where an Additional Termination Event happens, all Transactions will be Affected Transactions and the Non-affected Party can terminate them all.

Many Additional Termination Events are credit rating related (e.g. rating agency downgrades of long-term debt securities below a minimum rating or the cancellation of a rating by a credit ratings agency) and they therefore impact the whole contractual relationship between the parties and not just a particular group of Transactions. 

A Credit Department will decide if it wishes to include Additional Termination Events in the Schedule in a particular case. These can vary according to the type of counterparty. 

For instance with a small corporate this might include a change of control clause.  With a project finance company this might include an Additional Termination Event if a particular government licence is not renewed.  An Additional Termination Event for a larger corporate could be a credit ratings downgrade provision. A series of credit rating triggers often apply in Agreements covering structured transactions.

Additional Termination Events for hedge funds include the maintenance of Net Asset Values over agreed periods; the departure of key investment managers or the termination of a major Investment Management Agreement.

With sovereign counterparties Sovereign Events of various sorts are Additional Termination Events.

More common Additional Termination Events are Impossibility in 1992 ISDA Schedules and Material Adverse Change of a party’s financial condition since its last audited accounts usually but not exclusively with corporate counterparties.

As mentioned above, if any of these Additional Termination Events occurred to the relevant counterparty, the whole contractual relationship would be deemed to be tainted and the Non-affected Party would have the right to terminate all Transactions under the ISDA Master Agreement.

Your Credit Department will decide which Additional Termination Events (if any) it wants in a particular Agreement Schedule and the trigger levels for them.

Paul Harding

© Derivatives Documentation Limited

Posted by Paul Harding

Tagged: ISDA negotiation ISDA negotiator ISDA

Category: ISDA negotiation

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