Broadly speaking, events of default may occur where one party is at fault. The party at fault is known as the ‘defaulting party’, and the other party is referred to as the ‘non-defaulting party’. Upon the occurrence of an event of default, a party may elect to terminate all transactions under the ISDA
Master Agreement. The ISDA Master Agreement contains eight standard events of default (see Diagram 1). It should be noted that additional events of default can be added by the parties by amending the schedule to the ISDA Master Agreement.

Diagram 1

Failure to Pay or Deliver
Applies to the failure by a party to make any payment or delivery when due under the ISDA Master Agreement. Payments are covered in more detail in the ‘Payments’ section.

Breach or Repudiation of Agreement
Applies to the failure by any party to comply with any agreement or obligation under the ISDA Master Agreement. It is important to note that this event of default does not apply to any failure to make a payment or delivery and certain other obligations (for example, to deliver certain specified information), since these events are subject to different treatment elsewhere.
An event of default under this section may also occur if a party repudiates or challenges the validity of the ISDA Master Agreement, confirmation or any transaction. The effect of this provision is to give a party the right to terminate if the other party has clearly indicated an intention not to
perform its contractual obligations, even if the other party has not actually failed to perform.

Credit Support Default
Where a party’s obligations under the ISDA Master Agreement are supported by external credit support or guarantee, a failure in the efficacy of that credit support may allow the other party to terminate. For example, a failure to maintain any security interest granted to the other party, or the
unanticipated cessation of a financial guarantee provided by a third party.

Misrepresentation
Applies to certain breaches of representations (other than tax representations) made in the ISDA Master Agreement. Representations are covered in more detail in the ‘Contract Formation and Legal Relations’ section.

Default Under Specified Transaction
Applies to certain events that would indicate there has been an event of default or another unexcused failure to perform in respect of other transactions entered into between the parties, but which are not governed by the ISDA Master Agreement. These are known as “specified transactions”.

The ISDA Master Agreement sets out a suggested list of specified transactions. This list includes a broad range of derivatives and securities financing transactions. Parties may broaden or narrow the application of this event of default by amending the list of specified transactions.

Cross-Default
Applies to a default under agreements relating to borrowed money, referred to in the ISDA Master Agreement as ‘specified indebtedness’. The default by a party under a loan agreement, for example, could indicate that the creditworthiness of that party has deteriorated sufficiently for the other party to wish to terminate the ISDA Master Agreement.

In order to avoid the occurrence of an event of default in scenarios where the amount of specified indebtedness in default is small or immaterial, parties will typically specify that a threshold amount should apply. If the amount unpaid is greater than the threshold amount, a cross-default may occur.

Bankruptcy
The bankruptcy event of default is drafted to be triggered by a variety of events associated with bankruptcy or insolvency proceedings under English or New York law. However, the provision recognizes that market participants are located in and organized under the laws of different
countries. It has therefore been drafted to be broad enough to be triggered by analogous proceedings or events under any bankruptcy or insolvency laws pertaining to a particular party. For example, the definition includes insolvency related events such as being unable to pay debts when they fall due, being subject to insolvency proceedings, or making a financial arrangement with creditors.

Merger Without Assumption
Applies where a party merges with or transfers substantially all of its assets to another entity, or reorganizes into another entity, and the resulting entity fails to assume the former party’s obligations (like maintaining Investment grade for external rating) under the ISDA Master Agreement or fails to maintain any existing credit support arrangements.