ISDA Illegality/Force Majeure Protocol
The ISDA Illegality/Force Majeure Protocol (the “Protocol”) offers market participants an efficient way to amend their 1992 ISDA Master Agreements with the more sophisticated Illegality and Force Majeure provisions of the 2002 ISDA Master Agreement helping them to better address any issues that might arise if a Eurozone member state exited the Eurozone and imposed capital controls, potentially making it illegal for parties in that country to make Euro-denominated payments.
The key changes of the 2002 ISDA Master Agreement’s revamping of the Illegality Termination Event and introduction of the Force Majeure Termination Event include: (i) clarification that any transaction-specific fallbacks should take effect before these provisions apply, (ii) removal of the obligation to attempt to transfer transactions before relying on the Illegality or Force Majeure Termination Event and (iii) providing for deferral of payments and deliveries during a waiting period before these provisions take effect (and for interest and compensation on those deferred payments and deliveries).
The published version of the Protocol includes additional modifications to the definition of "Protocol Covered Master Agreement," which are reflected in the blackline against the pre-publication version. These changes expand the Protocol's coverage to include 1992 Master Agreements containing an Impossibility Termination Event, and related modifications, as suggested in Section VIII of the User's Guide to the 1992 ISDA Master Agreements (1993 Edition) published by ISDA.
Please refer to the "Frequently Asked Questions" below for more information on both the Protocol’s substance and the adherence procedure.
The Protocol is open to ISDA members and non-members. There is no cut-off date to this Protocol. ISDA does however reserve the right to designate a cut-off date by giving 30 days notice on this site.
The following documents must be submitted via email to the ISDA office in New York in order to adhere to the ISDA Illegality/Force Majeure Protocol (the "Protocol"):
- One signed copy of the Adherence Letter, providing information on the contact person at the Adhering Party.
- One conformed copy of the Adherence Letter. A conformed copy is an exact copy of the signed letter with the name of the person signing the letter typed on the signature line. A signature should not appear on the conformed copy of the letter.
ISDA will only accept email delivery of Adherence Letters. An Adhering Party is not required to send original Adherence Letters to the ISDA offices.
Please submit all Adherence Letters via email to
. It is critical that both a scanned, signed Adherence Letter, as well as a scanned, conformed Adherence Letter is submitted. Entities will not be deemed to have adhered to the Protocol until both the signed and conformed Adherence Letters are submitted by email in accordance with the Adherence Period.
No other documents are required in order to adhere to the Protocol. Supporting documentation, such as board resolutions or a list of authorized signatures, can be provided and will be held in safekeeping by ISDA, but it is not necessary to submit such documents in order to adhere to the Protocol. Access to supporting documentation will only be provided if requested in writing.
Email address for Delivery of Adherence Letters:
Policy Regarding Conformed Copies
A signed copy and a conformed copy of an Adherence Letter must be received in order for ISDA to list a party as having adhered to the Protocol.
The most common problem experienced in the adherence process for prior Protocols was the failure to include a conformed copy of the Adherence Letter. We remind parties that a conformed copy, together with a signed copy, must be submitted to ISDA in connection with adherence to the Protocol.
ISDA has prepared this brief summary of frequently asked questions to assist in your consideration of the Illegality/Force Majeure Protocol (the "Protocol").
THIS FREQUENTLY ASKED QUESTIONS DOES NOT PURPORT TO BE AND SHOULD NOT BE CONSIDERED A GUIDE TO OR AN EXPLANATION OF ALL RELEVANT ISSUES OR CONSIDERATIONS IN CONNECTION WITH THE PROTOCOL. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING OR ADHERING TO THE PROTOCOL. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH ANY OF ITS DOCUMENTATION OR OTHER DOCUMENTATION MAY BE PUT.
When do I need to send in my Adherence Letter?
The Protocol is open on July, 11 2012. There is no cut off date for adherence. ISDA reserves the right to designate a closing date of this protocol by giving 30 days notice on this site.
How do I send in my Adherence Letter?
All Adherence Letters must be delivered by email to ISDAIFMprotocol@isda.org. In the email, you must submit both your conformed and executed copies of the Adherence Letter. You must use the form of letter for the ISDA Illegality available on the ISDA website. Click here for form of adherence letter.
The Adherence Letter(s) should be on your institution’s letterhead. Nothing in the form of Adherence Letter available on ISDA’s website may be changed with the exception of completing the details of your institutional name, date and signature block.
Please do not send your original Adherence Letter(s) by mail to ISDA.
What is a conformed copy?
A conformed copy of the Adherence Letter means that the name of the authorized signatory (for example, Patricia Smith) is typed rather than having Patricia Smith’s actual signature on the letter. ISDA only posts on its website the conformed copy of all Adherence Letters.
You must also submit an executed, or signed, copy of the Adherence Letter in addition to the conformed copy of the Adherence Letter. ISDA keeps the executed copy of the Adherence Letter for its files and does not share the executed copy with anyone else.
Who is an authorized signatory?
An authorized signatory to the Adherence Letter is an individual who has the legal authority to bind the adhering institution.
We have more than one fund and therefore more than one DTCC account number. Will we need to submit more than one Adherence Letter?
No. You can list numerous DTCC numbers on one adherence letter.
SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS
What if I am an investment or asset manager, not all of my discretionary management agreements permit me to amend my client’s agreements?
If you are an investment or asset manager and act on behalf of multiple funds, you have the following options:
- If you have authority to adhere on behalf of all of your clients you may do so by indicating the following in the signature block:“Investment/Asset Manager, acting on behalf of the funds and accounts listed in the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) and another Adhering Party [and acting on behalf of the funds and accounts listed in the exhibit to this Adherence Letter in relation to the relevant Agreement (or other agreement which deems an Agreement to have been created) between such fund or account and another Adhering Party]”.If you wish to adhere in this way, you must ensure that you have the authority to do so from all clients on whose behalf you enter into credit derivative transactions covered by the Protocol.
- If you do not have authority from all of your funds, you can adhere on behalf of those funds whose permission you have by indicating the following in the signature block “Investment/Asset Manager, acting on behalf of the funds and accounts identified in [the] attachment  to this Adherence Letter in relation to the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) and another Adhering Party [and [acting on behalf of the funds and accounts identified in attachment 2 to this Adherence Letter] in relation to the relevant Agreement (or other agreement which deems an Agreement to have been created) between such fund or account and another Adhering Party]”. The attachment to your Adherence Letter can either name the clients or funds, or identify them with a unique identifier which will be known and recognized by all other Adhering Parties with which the relevant funds or clients have entered into Protocol Covered Transactions. The attachment to your letter will be posted on the ISDA website with your Adherence Letter.Any credit derivative transactions which you enter into on behalf of funds that are not listed in your adherence letter(s) will not be covered by the Protocol and you and the relevant counterparty will have to enter into a bilateral amendment agreement as discussed in 3 below if you wish to implement the changes.
- To the extent that you do not have authority from all of your funds and you are not able to disclose your clients whether by name or a unique identifier, you cannot adhere to the Protocol on behalf of any fund that you cannot identify. Your option in these circumstances is to enter into bilateral amendment agreements with each relevant counterparty listing the funds who’s whose Transaction(s) with that counterparty will be amended by incorporating the amendments made by the Protocol.
- To the extent that you add a fund to an umbrella master agreement after the Implementation Date of the Protocol (whether such a client was an existing client on or a client acquired after the Implementation Date) that client would not be covered by your adherence to the Protocol and any Transactions you enter into on behalf of that client would not be Protocol Covered Transactions. Your option in these circumstances is to bilaterally agree that the Protocol should be incorporated into all Transactions that would otherwise be Protocol Covered Transactions (had the fund adhered to the protocol). This could be done when you add the client to the umbrella master agreement.
Can I change the text of the Adherence Letter?
No. The Adherence Letter must be in the same format as the form letter published in the Protocol.
Does it cost any money to adhere to the Protocol?
Can I revoke my participation in the Protocol?
No. Once an Adherence Letter has been accepted by ISDA, an Adhering Party is bound by all amendments with other parties that have already adhered to the Protocol or, subject to the discussion below, that adhere before a designation of the Annual Revocation Date.
An Adhering Party may, at any time during the period from October 1 to October 31 of a calendar year, deliver to ISDA a notice specifying the Annual Revocation Date as its cut-off date in respect of amendments with future Adhering Parties. The effect of such a letter will be to withdraw adherence for future Adhering Parties as of December 31 in that calendar year. Although amendments already made will not be revoked, any subsequent adherence by new Adhering Parties after the designated Annual Revocation Date, will not bind the party that has submitted a Revocation Notice.
You can, however, bilaterally agree to amend your Covered Master Agreement with your counterparty (the other Adhering Party) and any such subsequent amendments will supersede those made by the Protocol to the extent that they are inconsistent.
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,
- creates a new replacement currency,
- promulgates a currency law that redenominates (or purports to redenominate) certain Euro obligations into that new currency,
- imposes capital and exchange controls (and possibly border controls), and
- 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.
- Waiting Period
- To allow parties to evaluate the circumstances prior terminating Transactions when there is a possibility that the events triggering an Illegality or a Force Majeure Event can be promptly resolved, a “Waiting Period” was introduced in the 2002 ISDA Master Agreement. If, nonetheless, the problem cannot be resolved within the designated Waiting Period, the right to terminate can be invoked by the parties.
- Upon the occurrence of an Illegality or a Force Majeure Event, a temporary standstill generally applies in respect of Affected Transactions for the duration of this Waiting Period, assuming the problematic event or circumstance persists. In the case of Illegality, the Waiting Period is three Local Business Days (or days that would have been Local Business Days but for the occurrence of the relevant event or circumstance) following the occurrence of the event or circumstance. In the case of Force Majeure Event, the Waiting Period is eight Local Business Days (or days that would have been Local Business Days but for the occurrence of the relevant event or circumstance) following the occurrence of the event or circumstance. However, in the case of both Illegality and Force Majeure Event, no Waiting Period applies where the problematic event or circumstance affects a payment or delivery under, or compliance with, a Credit Support Document that is actually due on the relevant day.
- Deferral of Payments and Deliveries: If an Illegality or a Force Majeure Event occurs, payments and deliveries under Affected Transactions will be deferred and will not become due until: (i) the first Local Business Day or Local Delivery Day (as appropriate) 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.
- Deferral of Rights to Terminate: Rights to terminate Affected Transactions by reason of the occurrence of an Illegality or a Force Majeure Event only mature if the Illegality or Force Majeure Event is continuing at the end of any applicable Waiting Period.