6(e)(ii) - 1987 ISDA Provision
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1987 ISDA Interest Rate and Currency Exchange Agreement
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Crosscheck: 6(e)(ii) in a Nutshell™
Original text
See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.
Resources and Navigation
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Comparisons
Redlines
- 1992 ⇒ 2002: Redline of the ’02 vs. the ’92: comparison (and in reverse)
- 1987 ⇒ 1992: Redline of the ’92 vs. the ’87: comparison (and in reverse)
- 1987 ⇒ 2002: Redline of the ’02 vs. the ’87: comparison (and in reverse)
Discussion
The calculation methodology for determining amounts payable upon termination of a transaction — these only got labelled “Close-Out Amounts” in 2002 — as a result of a Termination Event (as opposed to an Event of Default) has evolved markedly in each iteration of the ISDA Master Agreement.
The 1987 ISDA drew no great distinction drawn between Events of Default and Termination Events at all, treating an Event of Default the same as a Termination Event with only one Affected Party. Hence, there is no section 6(e)(i) and 6(e)(ii); it is all bunched into a single section 6(e).
The 1992 ISDA recognises that Events of Default and Termination Events need to be treated differently, even where there is only one Affected Party, but the 1992 ISDA maintains the flexibility to calculate the termination value using the Loss or Market Quotation techniques. The choice of First Method and Second Method do not apply to Termination Events, however, for reasons discussed below.
The 2002 ISDA dispensed with the Loss and Market Quotation concepts, to be replaced by a single, more sensible Close-out Amount concept.
Basics
One Affected Party
If there is only one Affected Party, the close-out method is largely the same as if it were an Event of Default, (assuming, if you are under an 1992 ISDA, you selected the Second Method — the reason for that being that the First Method is basically insane, no-one uses it anyway, and in any case it would be extremely punitive where the Transaction is terminating because of a non-default Termination Event. This means you do have to factor in out-of-the-money positions (First Method allows you to ignore them!) but you can at least value them on your side of the bid/ask spread. This is mainly reasonable — especially in the case of Additional Termination Events, which are more-or-less fault based — but it seems a bit harsh where the Termination Event is genuinely beyond the control or anticipation of the Affected Party.
An interesting little development in the 2002 ISDA therefore is the rider in Section 6(e)(ii)(3) that where the Termination Event is an Illegality or a Force Majeure Event — the classic “beyond my control” events, of course — the Non-Affected party is obliged to use the mid-market rate, and not its own side of the market.
Two Affected Parties
Where there are two affected parties the method is basically, “each person calculates Affected Transaction termination values, totals up any outstanding Unpaid Amounts, sums them and the parties split the difference, paying that to the person who would up claiming the higher amount. This is naturally mid-market.
The 1992 ISDA is hideously confused mainly on account of the unaccoutable differences in approach between Loss and Market Quotation and their differing attitude to Unpaid Amounts. More on that in the premium section.
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