The International Swaps and Derivatives Association, Inc. (“ISDA”) has published a form of amendment to the 1992 and 2002 ISDA Master Agreements intended to address continuing uncertainty regarding the condition precedent set forth in Section 2(a)(iii) of both such Master Agreements (“Section 2(a)(iii)”).
Under Section 2(a)(iii), a party’s obligations under Section 2(a)(i) of the ISDA Master Agreement are subject to the condition precedent, among others, that no Event of Default or Potential Event of Default has occurred and is continuing with respect to the other party. In other words, a non-defaulting party is excused from performance while a default exists with respect to the defaulting party. Interpretation issues have arisen as to the non-defaulting party’s ability to continue to suspend its performance in reliance on Section 2(a)(iii) in the event of the defaulting party’s continuing default.1
An internal working group within ISDA had been considering various alternatives to address market concerns regarding such interpretive issues and to establish a mechanism to place agreed limits on the non-defaulting party’s right to suspend its performance. In June 2014, ISDA published a form of amendment to the ISDA Master Agreement that would grant a defaulting party the right to designate a “Condition End Date” imposing a specified time limit on the non-defaulting party’s ability to suspend its payment obligations in reliance on the Section 2(a)(iii) condition precedent.
Parties may incorporate this concept into their swap agreements by entering into the proposed form of amendment, or by using other negotiated solutions developed by the market such as bespoke “fish or cut bait” clauses. In addition, parties should note that similar concepts may be applied to ISDA Credit Support Annexes and Credit Support Deeds in order to address similar concerns with respect to the condition precedent under Paragraph 4(a)(i) therein.
All market participants should continue to monitor developments in this area.