Switzerland Update: ISDA Master Agreement – Lessons Learned from the Financial Market Crisis 2008.

Not only banks and insurance companies, but also many other companies, but also pension funds conclude derivative transactions to hedge financial risks. This is often done on the basis of an ISDA Master Agreement. What should be done if the counterparty is threatened or even affected by insolvency proceedings or another event of default? What can you do to prepare for this emergency?

ISDA Master Agreement

The ISDA Master Agreement is a framework agreement that covers all derivative transactions concluded under this agreement. Each derivative transaction is documented in so-called confirmations. If an event of default occurs, the ISDA Master Agreement contains instructions on how to proceed. These leave the non-defaulting party relatively much leeway in some respects. The procedure must be carefully planned, because the appropriateness of the procedure can subsequently become a point of contention.

Automatic termination of bankruptcy events

If a Swiss counterparty is affected, many contracting parties have agreed on automatic termination in the schedule to the ISDA Master Agreement. Whether this is the case must be checked on a case-by-case basis. If the schedule for the ISDA Master Agreement provides for automatic termination, the ISDA Master Agreement and thus all derivative transactions are often terminated automatically. If the schedule for the ISDA Master Agreement does not provide for automatic termination, there is a right of termination.

Close-out in case of termination

The basic principle of the ISDA Master Agreement is that in the event of termination of the ISDA Master Agreement, all existing obligations arising from the individual derivative transactions, whether payment or delivery obligations, are replaced by a single payment claim. The ISDA Master Agreement determines how this settlement claim is to be determined.

What to do?

The settlement amount shall be determined as of the Early Termination Date or, unless reasonably practicable, the earliest reasonably practicable date after the Early Termination Date. If the derivative transaction is to be replaced, offers must always be obtained on an early termination date. Rapid action is therefore necessary. If the transactions are not to be replaced or if this is not possible or at least not possible on an early termination date, the further procedure must be checked on a case-by-case basis. Waiting is also not permitted in this constellation. Any premature termination is an extraordinary situation. Although quick action may be required, the overall situation should first be analysed. Decisions should be documented.

How can you prepare for an emergency?

If an event of default, in particular a bankruptcy event, occurs, a quick decision is required on how to proceed. This makes it all the more important to prepare in good times. This is all the more true when dark clouds are already gathering on the horizon. Possible measures range from the storage of all relevant documentation in a quickly accessible place, the monitoring and documentation of each transfer of the individual transactions to the documentation of whether an automatic termination is planned and, if so, to which events this applies and whether this relates only to the counterparty or also to third parties.

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

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