Terminating derivatives entered into under an ISDA Master Agreement

This guidance note discusses how to terminate a derivative transaction that is governed by an ISDA Master Agreement, including:

• • the differences between Termination Events and Events of Default;
• • what to include in Termination Notices;
• • what to include in calculation statements;
• • the interest payments that accrue on the Early Termination Amount (and different setting out between the 1992 and 2002 ISDA Master Agreements); and
• • what close-out netting is.

See Terminating derivatives entered into under an ISDA master agreement.

Scope of the ISDA Master Agreement — section 5 (Events of Default and Termination Events)

A Termination Event is different from an Event of Default because it may be due not to the act or failure to act of a party but rather to an event which is outside its control.

This guidance note takes you through the Events of Default and Termination Events in the ISDA Master Agreement.

See Scope of the ISDA Master Agreement — section 5 (Events of Default and Termination Events).

Scope of the ISDA Master Agreement — section 6 (Early Termination)

Section 6 of the ISDA Master Agreement sets out the consequences of an occurrence of an Event of Default or Termination Event.

Importantly, it sets out how the close out netting mechanism operates following an Event of Default or Termination Event.

See Scope of the ISDA Master Agreement — section 6 (Early Termination).

Potential Events of Default under an ISDA Master Agreement and cure periods — summary and comparison table

Under an ISDA Master Agreement, if an Event of Default occurs, often the Defaulting Party is given a period of time in which to “cure” the default. This means that until that cure period has ended, the derivative transaction cannot be terminated early on the grounds of an Event of Default.

This guidance note sets out the cure periods for the different Events of Default in both bullet point format and in a table.

See Potential Events of Default under an ISDA Master Agreement and cure periods — summary and comparison table.

Notices to send when terminating derivative transactions early

If an ISDA contract is going to be terminated, it is important to ensure that the terms of the ISDA Master Agreement permitting Early Termination are followed to the letter. Any error can lead to the termination not having been effected properly and being invalid.

This guidance note details how to send a notice under s 6 of the ISDA Master Agreement to terminate a derivative transaction and what to include in:

• • a Potential Event of Default notice;
• • an Event of Default notice;
• • a Termination Event notice; and
• • a calculation statement.

See Notices to send when terminating derivative transactions early.