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Saturday, November 27, 2010

An analysis of the ISDA Master Agreement 2002

I'm not an expert on derivatives law/markets but there are some interesting nuggets in this agreement from a legal/economic perspective. Thanks to the SEC which mandates filing of financing agreements, I could get a legal electronic copy of the ISDA agreement here. I noticed the following points(preceded by Article)
  •  1(c)-Each agreement is taken as a whole which means that disputes/issues with other agreements will not give right of setoff etc(to the client).
  • 2(a)(iii)-To guard against credit risk, the parties are excused from their obligations if an event of default/potential event of default has occured. The latter being subjective, it is an easier escape route
  • 2(d)(i)(4) provides for the person liable to bear the effect of tax changes with/without grossing up. The party with stronger negotiating power can tweak this clause to their benefit
  • 3(a)-The basic representations sought here(status/powers/violation/consents/obligations) are really speaking redundant(except maybe to prove equity/intent in arbitration forum). If a transaction is really ultra vires/void, no amount of representations will make it valid.
  • 6-The concept of Liquidated damages on premature termination is enshrined here with the clause that an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses.
  • 8(d)-Contrary to the legal concept of an indemnity(actual loss should have been incurred), there is no need to prove an actual loss here  as "it will be sufficient for a party to demonstrate that it would have suffered a loss had an actual exchange or purchase been made."
  • 9(a)-Misspelling cannot be pleaded as the document "supersedes all oral communication and prior writings with respect thereto" 
  • 11-The defaulting party is made liable for the legal/other expenses incurred by the prosecuting party!! Not that unusual but again against the 50:50 cost split that may occur elsewhere.
  • 13(b) mandates disputes to be submitted to English Law/ New York Law and debars the party(actually nonbank) from pleading the genuine ground of inconvenient forum/jurisdiction. Though litigation elsewhere is not prohibited, this clause makes it difficult for domestic companies to defend their case in case of litigation. Practically matter may be settled in arbitration only but this is a potent weapon against the non-bank/non-MNC.
  • 13(d) again(relating to waiver of immunity) seems redundant because once a party has decided to default, even if an international ruling is returned against it, it is unlikely to honour it.

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