ISDA amends the notices, force majeure and illegality provisions of the ISDA Master Agreement

17 August 2023

ISDA have published a set of amendments to the ISDA Master Agreement (the ISDA MA) following the Covid-19 pandemic and sanctions on Russia. The changes allow market participants to deliver close-out notices via email, give a specific time for when all notices become effective and conform the treatment of Illegalities and Force Majeure Events under the English law Credit Support Annex (CSA) with the treatment under the New York law CSA. The amendments work with both the 1992 and 2002 forms of ISDA Master Agreement.

Email notices in respect of Sections 5 and 6

Notices delivered under Sections 5 and 6 of the ISDA MA relate to a default scenario. They are the means by which one party can notify the other that a default has occurred, that it wishes to terminate the trading relationship, and send details of its calculations for valuing the terminated transactions. The base position under the ISDA MA is that these notices can only be delivered by letter or fax (note that fax is only allowed under the ISDA 2002 Master Agreement) and not via email. While parties often amend these notice provisions to allow for more flexibility, not everyone can and recent case-law makes it clear that the contractual requirements have to be strictly adhered to (as per Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Comm)).

The amendments published by ISDA allow these notices to be delivered via email. They also set out further detail on when email notices are deemed to take effect, referring to the date the email is relayed to the recipient’s email infrastructure.

The reason for these changes is that the Covid-19 pandemic and Lehman Brothers insolvency have each shown that the practicalities of delivering written notices by hand can lead to bizarre consequences or prove impossible. Stories from the Lehman insolvency include notices being thrust upon security guards of buildings standing on the site of previous buildings that had been long bulldozed but still remained in the notices provision of the relevant ISDA. During the Covid-19 pandemic, uneasy decisions had to be made between balancing the litigation risk of failing to deliver a notice by hand as required by the ISDA and the health risks to the person delivering the notice if the contractual requirements were complied with.

These amendments can therefore be seen as bringing the ISDA MA up-to-date with the modern world. The counter-argument is that market participants are used to and expect a degree of formality for these notices, especially given their significance, and that most well-advised people amend their notice provisions to suit their processes anyway.

Timing for delivery of all notices

Under Section 12 of the ISDA MA, notices delivered after “the close of business” will be deemed given and effective on the next business day. “Close of business” is a somewhat hazy concept which is context dependent and has no universal meaning (as per Lehman Brothers International (Europe) v ExxonMobil Financial Services [2016] EWHC 2699 (Comm)). However it can have significant value attached to it if the relevant notice is being delivered in a time of market turbulence. These changes replace close of business with a specific time (the Notice Delivery Cut-off) of 5pm (or another time agreed between the parties) in a location specified for each party in the ISDA Schedule.

This change will give welcome clarity to the market and set a market-standard benchmark for other trading documents (such as repo and stock-lending master agreements).

Illegality, force majeure and CSAs

When an illegality or force majeure event occurs, the parties have to wait for a specified period (the Waiting Period) before terminating the affected transactions, to see whether the event can be cured. This is intended to protect the party who is due to make a payment but cannot do so because of an illegality or force majeure. However, the Waiting Period does not apply where the failed payment is due under a credit support document. The other party has an immediate right to terminate the affected transactions without having to sit out the Waiting Period.

The English law CSA has a quirk: unlike the New York law CSA (and the English law Credit Support Deed) it is not classified as a credit support document but instead constitutes a ransaction under the ISDA MA. This reflects the title transfer of cash and securities under the English law CSA as opposed to the security interest created under the New York law CSA. It has the advantage of allowing the English law CSA to be swept into the close-out calculation under the ISDA MA and benefiting from the close-out netting mechanics under Section 6. The disadvantage is that the English law CSA still has the Waiting Period applied to it following an illegality or force majeure.

This distinction came to light following the imposition of sanctions on Russia, when it emerged that the legal distinction between title transfer under the English law CSA and the security interest under the New York law CSA was not at the forefront of market participants’ minds; not unreasonably, they expected collateral delivered under the two CSAs to be treated identically. These changes correct this quirk so that the English law CSA is deemed to be a Credit Support Document for the purpose of illegality and force majeure.

This article was co-authored by trainee solicitor, Amber Dullaway.