ISDA Illegality/Force Majeure Protocol - FAQs

ISDA Illegality/Force Majeure Protocol - FAQs

What does the Protocol do?
The Protocol is part of ISDA’s Eurozone contingency planning activity. While ISDA continues to believe that an exit by a Eurozone member state from the Eurozone is unlikely, we deem it prudent to prepare for it given that its effects could be significant. Therefore, 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, to better address any issues that might arise if a member state exited the Eurozone and imposed capital controls that may make it illegal for parties in that country to make Euro-denominated payments.
The principal challenge to effective planning for a Eurozone exit is the uncertainty over what may happen and in what form. In the absence of any facts, we have made certain assumptions as to the more likely scenarios to design a plan to prepare for those scenarios. The scenario for which many market participants are preparing is that in which a member state:

announces its immediate exit from the Eurozone,

1. creates a new replacement currency,
2. promulgates a currency law that redenominates (or purports to redenominate) certain Euro obligations into that new currency,
3. imposes capital and exchange controls (and possibly border controls), and
4. declares additional bank holidays to give time to effect the exit and the redenomination.

It should be stressed that this is no more than an assumed scenario and many elements of it are uncertain. This uncertainty has significant consequences for contingency planning. Nonetheless, Members asked us to publish this Protocol as it will help them to better address the potential exit of one or more member states from the Eurozone.
The Protocol addresses the risks from item # 4 in the sample scenario described above. Imposition of capital controls may render the payment or delivery obligations of a party subject to them illegal or impossible. Parties should consider whether, in any specific fact situation, the Illegality Termination Event under the ISDA Master Agreement may be triggered. In this regard, the 2002 ISDA Master Agreement’s revamping of the Illegality Termination Event and introduction of the Force Majeure Termination Event represent an improvement on the corresponding provisions of the 1992 ISDA Master Agreement, as described below.
The key changes of the 2002 ISDA Master Agreement (as further detailed in the User’s Guide to the ISDA 2002 Master Agreement) include:
Transaction-specific fallbacks
An Illegality or a Force Majeure Event may only be triggered after giving effect to any applicable provision, disruption fallback or remedy specified in a Confirmation or elsewhere in the 2002 ISDA Master Agreement. If these Transaction-specific fallbacks do not resolve the problem, then the Illegality/Force Majeure Event provisions take effect.
For example, if the parties have incorporated the 1998 FX and Currency Option Definitions or the 2002 ISDA Equity Derivatives Definitions in the relevant Confirmation, any applicable disruption events and related fallbacks in these definitional booklets will be given effect and there may be no role for the Illegality (or Force Majeure Event) Termination Event. If, however, the applicable fallbacks, if any, do not resolve the problem, Illegality (or Force Majeure Event) may come into play. In view of the anticipatory nature of Illegality (and Force Majeure Event), these types of fallbacks may not, under the terms of the Confirmation for the Transaction, in fact apply at the time a party believes an Illegality (or a Force Majeure Event) has occurred.
No obligation to transfer Transactions
The obligation of the Affected Party under the 1992 ISDA Master Agreement to use all reasonable efforts to transfer Affected Transactions to another Office or Affiliate, in order to avoid the occurrence of the Termination Event, is not included in the 2002 ISDA Master Agreement.