For some time now, market participants have been concerned about the exit of a member-state from the Eurozone. These concerns are most acute in—but not limited to—the case of Greece, as it struggles to implement structural reforms demanded by its troika of lenders: the European Central Bank, the International Monetary Fund and the European Commission. As part of its Eurozone contingency planning, the International Swaps and Derivatives Association, Inc. (“ISDA”) has attempted to address some of the risks relating to derivatives transactions in the event such an exit occurs through the publication on July 11th of the Illegality/Force Majeure Protocol (the “Protocol”).[1] The purpose of the Protocol is to facilitate the amendment of 1992 ISDA Master Agreements with the more sophisticated “Illegality” and “Force Majeure” provisions of the 2002 ISDA Master Agreement.
The Protocol recognizes that numerous scenarios for a Eurozone exit may occur, including those where a member state: (i) announces its immediate exit from the Eurozone; (ii) creates a new replacement currency; (iii) promulgates a currency law that re-denominates (or purports to re-denominate) certain Euro obligations into that new currency; (iv) imposes capital and exchange controls (and possibly border controls); or (v) declares additional bank holidays to give time to effect the exit and the redenomination. Specifically, the Protocol addresses the risks inherent in the imposition of capital controls that may render the payment or delivery obligations of a party illegal or impossible.
The 2002 ISDA Master Agreement included numerous changes and enhancements to the 1992 ISDA Master Agreement relating to the illegality or impossibility of performance. One of these is to give effect to any disruption fallback or remedy specified in a Confirmation or elsewhere in the 2002 ISDA Master Agreement before an Illegality or Force Majeure Event is triggered. Another change is to not require the “Affected Party” to use all reasonable efforts to transfer “Affected Transactions” to another office or affiliate to avoid the occurrence of a Termination Event. Finally, the 2002 ISDA Master Agreement provides the parties with, generally, a “Waiting Period” of three Local Business Day in the case of an Illegality and eight Local Business Days in the case of a Force Majeure during which they can evaluate the circumstances before being allowed to terminate. During the Waiting Period, payments and deliveries under Affected Transactions are to be deferred and do not become due until: (i) the first Local Business Day following the end of any applicable Waiting Period; or (ii) if earlier, the date on which the Illegality or Force Majeure Event ceases to exist.
There is no cut-off date for adherence to the Protocol, although ISDA may designate a closing date upon 30 days notice.
[1] The text of the Protocol may be found at https://www.isda.org/a/jYTDE/force-majeure-protocol-text.pdf.