ISDA Amendments to Master Agreement Relating to Default Notice Provision and Characterisation of Credit Support Annexes

As a response to member feedback relating to the COVID-19 pandemic and following a period of consultation with its members beginning in 2022, the International Swaps and Derivatives Association (ISDA) has published a number of standard form amendments to the ISDA Master Agreement relating to the standard notice provisions and force majeure language that market participants can adopt in their bilateral agreements. These include:

• Amendments to the “Notices” provision, which are useful to alleviate some of the practical challenges posed by the existing methods of delivering default and close-out notices; and
• Amendments related to the English law form of Credit Support Annex (CSA), which seeks to align certain provisions applicable in the case of Illegality and Force Majeure Event with that of a New York law CSA.

These are briefly described below.

Amendments to the “Notices” provision

The ISDA 2002 Master Agreement (MA)[1] specifies that default or termination notices given under Section 5 (Events of Default and Termination Events) and Section 6 (Early Termination; Close-Out Netting) may not be given by way of electronic messaging system or email (and in the case of the 1992 Multicurrency ‒ Cross-Border MA, the restriction is against the use of facsimile transmission and electronic messaging system).  As the delivery of default and close-out notices is typically time-sensitive, market practice would generally see these hand-delivered, sent by courier, or (in the case of the 2002 MA) by way of fax, in each case, to the address or fax number specified in the relevant Schedule (and as the well-established authority of Greenclose Ltd v National Westminster Bank Plc[2] tells us, it is important that a close-out notice be delivered by one of the stipulated methods, and strictly in adherence with the manner prescribed by the parties (such as delivering to the specified address or to a particular addressee)). These methods proved challenging to execute during the times of COVID-19 lock-down restrictions, and even since then in the age when working remotely has become the norm, and the specific addressees to whom such notices are to be delivered are more likely to be working remotely than before. The amendments to the “Notices” provision will alleviate these issues and modernise the practice of delivering close-out notices, recognising the use of emails as a valid method of delivery. Several other related changes will also introduce greater certainty in the determination of when a notice is deemed to be effective.

These proposed amendments to the “Notices” provision of the MA will introduce the following changes:

• Email as a permitted delivery method for Section 5 and 6 notices: There will no longer be a restriction against the use of email for the delivery of default or termination notices under these sections (and, in respect of a 1992 MA, the restriction against the use of facsimile transmission for such notices will be lifted), and the only prohibited method of delivery will be an electronic messaging system in the case of a default or termination notice under Section 5 or 6 of the MA.
• When an email is deemed to be effective: An email notice is effective on the date it is relayed to the recipient’s email infrastructure, and data from the sender’s email infrastructure can be used as evidence that such email has been successfully relayed to the recipient’s email infrastructure. This clarifies the position in the MA that an email notice is effective “on the date it is delivered”.
• Concept of Notice Delivery Cut-Off:  Any notice after the “Notice Delivery Cut-Off Time” (to be defined by reference to a specific time (default is 5:00 p.m.) at a specified location relevant to the recipient) will be deemed effective on the following Local Business Day. This removes the uncertainty of the current formulation in the MA which refers to the “close of business” on a Local Business Day (which, as the case of Lehman Brothers International (Europe) v ExxonMobil Financial Services BV[3] tells us, may not always mean 5:00 p.m., and the less than precise formulation could bring about potential arguments as to whether a notice served towards the end of a working day may be regarded as being effective on that day or the next). 

Alignment of Illegality and Force Majeure Event provisions between English law and New York law CSAs

CSAs governed by New York law constitute a “Credit Support Document” for an MA, whereas CSAs governed by English law constitute a “Transaction” for the purposes of the MA. This means that upon the occurrence of the Termination Events of Illegality under Section 5(b)(i) of the 2002 MA or a Force Majeure Event under Section 5(b)(ii) of the 2002 MA, as currently provided, certain provisions in the MA could affect English law CSAs and New York law CSAs differently:

The difference in approach between the two forms of CSAs may have historically stemmed from the fact that the English law CSA is a title-transfer arrangement (not creating a security interest), whereas the New York law CSA creates a pledge. The User’s Guide to the 2002 MA referred to the fact that “Members did not believe that an Affected Party which cannot deliver collateral required under the terms of a Credit Support Document should thereby earn unilateral rights to terminate Affected Transactions”[7] as support for the position taken in respect of a pledge CSA. However, where a party has in place both an English law CSA and New York law CSA, the occurrence of an Illegality or a Force Majeure Event could mean that it would be protected from performing and allowed to close out the transaction under one, but required to perform under the other.

With the proposed amendments, an English law CSA will also be treated as a Credit Support Document in respect of a Termination Event that is an Illegality or Force Majeure Event for the limited purposes of the provisions set out above. This will mean that performance under an English law CSA will no longer be deferred by the Waiting Period in the event of an Illegality or a Force Majeure Event, and a party that is unable to deliver collateral due to the Illegality or Force Majeure Event would not be able to unilaterally trigger a close-out.   

[1] For the purposes of this client alert, references to “MA” means either the 1992 or the 2002 Master Agreement, unless otherwise specified.

[2] [2014] EWHC 1156 (Ch).

[3] [2016] EWHC 2699 (Comm).

[4] Section 5(d) of the 2002 MA.

[5] Section 6(b)(iv)(2) of the 2002 MA.

[6] Section 6(e)(ii)(3) of the 2002 MA.

[7] Part I, Section G(1)(b).