Bankruptcy code trumps Isda

Author: | Published: 1 Nov 2009

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...