The ability of a party to an Isda master agreement to cease
making payments or deliveries to its counterparty if its
counterparty is in default, often referred to as the
flawed-asset approach, is considered to be one of the
fundamental pillars of the Isda documentation structure. Each
party's payment obligations under the master agreement are
conditional upon no event of default having occurred with
respect to the other, with the result that, from the outset, a
defaulting party is never absolutely entitled to receive future
payments provided for under any confirmation.
As a result, upon a default by a party (including upon its
insolvency) the replacement of the expected payment flows
provided by a single net sum based on the mark-to-market value
of the transactions under the master agreement does not, so the
argument goes, deprive the defaulting party of any asset to
which it was in fact entitled. Under...