Editor's note: For a long time, the mainland has formed three major market systems: the interbank OTC derivatives market with NAFMII as the main agreement, the securities and futures OTC derivatives market with SAC as the main agreement, and the over-the-counter market for foreign institutions with ISDA as the main agreement. Among them, the ISDA Master Agreement is an international agreement document issued by the International Swaps and Derivatives Association ("ISDA") to provide certain legal and credit protection mechanisms for parties involved in OTC derivatives transactions. In order to help you understand the functions and characteristics of the ISDA protocol, the CSI Investment Education Base has launched a column entitled "Approaching the ISDA Agreement" to share a comprehensive understanding of the ISDA protocol with all readers.
Cooperative institution: Guotai Junan Risk Management Co., Ltd
*因篇幅所限，本文仅对2002年ISDA协议部分重点条款进行分析思考。 为方便理解，请同时对照参阅ISDA发布的Chinese Translation of the 2002 ISDA Master Agreement-For Educational Purposes Only - Simplified Chinese。
Analysis of the main terms of the ISDA Master Agreement
The primary purpose of the ISDA Master Agreement is to determine how the parties to a transaction will exercise their rights or perform their obligations in the event of an event of default (the breaching party's reluctance to perform) or a termination event (the affected party's inability to perform) under the agreement. Therefore, the most important clause in the master agreement is the core clause of credit risk management, including what is an event of default, what is a termination event, and how to terminate early and calculate the termination amount. In this issue, I will continue to elaborate on some of my thoughts on some of the provisions of the Master Agreement Default Event, including "bankruptcy" and "consolidation without debt".
▍ Default events, termination events and processing procedures
Title of Article: (vii) Bankruptcy
Consider: (1) The bankruptcy events referred to in section 5(a)(vii) are very extensive. These Terms and Conditions apply equally to the parties to the transaction as well as to any credit support provider or specific entity (the latter is set out in Section 1(A) of the Annex).
(2) The provision may be triggered by a number of bankruptcy events or proceedings under New York State or English law, but the wording is broad enough to include the insolvency regimes of many other countries. Section 5(a)(vii) covers the following types of insolvency events:
1) Dissolution (except as a result of merger, merger or reorganization);
2) insolvency or insolvency;
3) make an assignment or repayment arrangement for the benefit of creditors, or reach a settlement agreement for debt settlement;
4) the debtor itself or its supervisor initiates bankruptcy proceedings;
5) The creditor initiates bankruptcy proceedings against the debtor, resulting in it being declared bankrupt, suspended, liquidated or taken over in accordance with the law, or the aforesaid proceedings are not rejected, revoked, suspended or prohibited within 15 days after commencement;
6) to make a winding down, winding-up or similar resolution, other than a winding-up or similar resolution pursuant to a merger or amalgamation;
7) appoint a bankruptcy administrator or similar bankruptcy officer;
8) The guarantor obtains most of the assets, or makes most of the assets sealed, seized, frozen or enforced, and the situation is not revoked or suspended within 15 days;
9) any similar litigation;
10) Take any action to advance or agree to any such procedure.
(3) It should be noted that in the case of bankruptcy, the law of the jurisdiction of the insolvent party's place of incorporation takes precedence over the law applicable to the agreement. Therefore, if the parties agree to be governed by the laws of the State of New York (selected in Section 4(h) of the Annex), and if the counterparty is a German and becomes bankrupt, the bankruptcy is governed by German law and not by the laws of the State of New York as agreed in the agreement. This is why ISDA currently receives netting opinions from more than 70 countries and updates them annually to confirm that the agreement's close-out netting mechanism works in the relevant countries in the case of insolvencies involving the types of counterparties covered by the agreement, so that the parties to a transaction need to confirm whether the law of the other party's jurisdiction recognises close-out netting before the agreement is signed (this affects the provision of capital and whether to opt in to the application of "automatic early termination", which will be discussed in more detail in a later article). It is worth mentioning that the ISDA China Netting Opinion was issued on 1 August 2022, in line with the implementation of the Futures and Derivatives Law, which made the legal enforceability of "close-out netting" clearly recognized at the domestic legislative level for the first time, and China obtained the status of "clean netting jurisdiction".
(4) As noted in section 5(a)(vii)(4), in the 2002 Agreement, proceedings commenced by the insolvent party (or its credit support provider or specific agency) and its regulators and insolvency officers are distinct from proceedings commenced by a third party. If a regulator or insolvency officer initiates insolvency proceedings, the event of default in bankruptcy occurs immediately, similar to when the insolvent party (or its credit support provider or designee) commences the proceedings on its own, whereas insolvency proceedings initiated by a third party currently have a 15-day grace period to be set aside. While it is unlikely that the application for liquidation will be rejected during this time, the above measures will ensure that the parties have time to discuss and decide whether the application is serious, vexatious or frivolous. With respect to the exercise of the rights of the holder of a security interest in article 5(a)(vii)(7), the 1992 agreement made it clear that the grace period for the secured creditor to avoid enforcement proceedings was 30 days. In the 2002 agreement, market participants deemed the 30-day grace period to be too long due to the Russian debt crisis in 1997 and the long-term capital investment event in 1998, shortening it to 15 days.
(5) The circumstances specified in this Event of Default are broad enough to be triggered by any pre-scheme or event under the bankruptcy law that may affect a particular party. However, it is still advisable to examine whether the insolvency regime of the State in which the parties are located falls within the categories outlined in this article. If not, amendments or additions will need to be made in the annex to cover all possible insolvency situations.
条款标题：(viii) Merger Without Assumption.不承担债务的合并
Consider: (1) Consolidation without incurring debt applies to a party to the transaction or its credit support provider.
(2) Default in the case of a merger without liability constitutes a merger, merger or transfer of all or substantially all of its assets by one party or its credit support provider to another institution and the circumstances in which such institution:
1) The ultimate surviving, successor or transferee entity has failed, or expressly will not perform, its predecessor's obligations under this Agreement or credit support documents;
2) The ultimate surviving, successor or transferee entity has not been guaranteed by the original credit support documents for the performance of its obligations under this Agreement.
(3) In either case, the counterparty is in a weaker position than the entity before the initial merger, and the non-merging party (which is also the non-defaulting party) has the right to terminate all transactions under this Agreement. Please note that the merger may involve companies in two different legal and tax jurisdictions, which is not related to this Event of Default, but may be related to the tax event resulting from the merger (Section 5(b)(iv)).
and (4) mergers, mergers, or transfers of assets that may give rise to credit events resulting from mergers (see Consideration of Section 5(b)(v) below) and incurring incurring incursions. In the event of the foregoing, Section 5(a)(viii) "Non-Obligated Consolidation", 5(b)(v) "Credit Event Due to Merger", 5(C) "Event Rating" indicate that such situation will be deemed to be an Event of Default for Non-Obligatory Merger and will not constitute 5(b) (v) "Reduction of Credit Rating due to Merger" of 5(b) "Termination Event", as one of the conditions of "Reduction of Credit due to Merger" is "no Event of Default under the Master Agreement".
Author: Liu Yan, the executive director of product design in the OTC derivatives department of Guotai Junan Risk Management Co., Ltd., and intern Wang Lishu assisted in the collection and translation of reference materials for this article.
Annotation:
[1] 篇幅所限，本文只对主协议重点条款进行分析思考；为方便理解，请对照ISDA发布的Chinese Translation of the 2002 ISDA Master Agreement-For Educational Purposes Only - Simplified Chinese进行阅读，该文版权属于ISDA。
Disclaimer: The information in this article is for investor education purposes only and does not constitute any investment advice to investors, and investors should not substitute their independent judgment or make decisions based solely on such information. The information in this article is intended to be accurate and reliable, but the accuracy or completeness of such information is not guaranteed, and no liability is accepted for any loss or damage that may arise from the use of such information.