ISDA Publishes Framework to Facilitate Close-Out of Derivatives Contracts

By: Kenneth Holston, Cheryl L. Isaac, Matthew J. Rogers, Jordan A. Knight, and Bradley D. Bostwick

On 27 June 2024, ISDA published the ISDA Close-out Framework, an interactive decision tree that market participants can use to help prepare for potential terminations of collateralized derivatives contracts that are documented under an ISDA Master Agreement. The ISDA Close-out Framework was launched in response to the March 2023 failures of Signature Bank and Silicon Valley Bank, which shed light on the complexities of terminating swaps and other over-the-counter derivatives in the multifaceted post-financial crisis swap regulatory regimes. ISDA designed this framework in response to feedback from the derivatives industry that factors such as segregated margin and stays on the exercise of termination rights and remedies makes terminating and closing out derivatives contracts increasingly complex.

The ISDA Close-out Framework is a preparatory resource designed to help firms coordinate internal business functions and internal and external legal, operational, risk management, infrastructure, and other relevant service providers to ensure they are adequately prepared for any potential future stress events.

Specifically, the ISDA Close-out Framework walks counterparties though two different types of Events of Default: failure to pay and bankruptcy. For each of these Events of Default, the ISDA Close-out Framework provides high-level information about the non-Defaulting Party’s potential rights under the 2002 ISDA Master Agreement (e.g., stop payments, stop transferring collateral, deliver a Notice of Failure to Pay), the impact of a resolution stay (for the United States, European Union, and United Kingdom only), and the ensuing procedures for calculating and paying an Early Termination Amount. There are also different scenarios for how and when to return collateral and how a counterparty may enforce its rights to collateral. The decision tree is in an easy-to-navigate digital format and includes helpful explanatory notes and embedded links to related resources.

This primer on the ISDA Close-out Framework is also a helpful resource. Please contact the authors of this blog if you have any questions on this new tool.

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