2002 Isda Master Agreement Illegality

In the world of finance, the International Swaps and Derivatives Association (ISDA) Master Agreement is a widely recognized document that governs over-the-counter derivative transactions. The purpose of the agreement is to provide a standardized framework for parties entering into such transactions, reducing risk and increasing efficiency.

However, in 2002, a legal issue came to light surrounding the ISDA Master Agreement. It was discovered that the agreement contained a provision that could potentially render the entire agreement illegal under certain circumstances.

This provision, known as the “Illegality Clause,” allows one party to terminate the agreement in the event that performance of the agreement becomes illegal due to a change in law. While this clause may seem like a straightforward safeguard, it was discovered that in some jurisdictions, terminating the agreement in this way would actually violate anti-avoidance laws.

In particular, the issue arose in relation to certain contracts that were designed to provide insurance or protection against losses caused by illegal acts. These contracts contain provisions that prevent the parties from benefiting from their own illegal acts. If the parties then attempted to terminate the ISDA Master Agreement under the Illegality Clause in response to a change in law that made their actions illegal, they would effectively be benefiting from their own illegal acts in violation of these provisions.

The implications of this discovery were significant. If the ISDA Master Agreement was rendered illegal in certain jurisdictions, it could have serious consequences for the entire derivative market. Parties who had entered into such agreements would potentially face significant legal and financial risks.

To address this issue, the ISDA issued a statement in 2002 reassuring market participants that it was committed to addressing the issue and that it would work with relevant regulatory bodies to find a solution. It also issued a revised version of the agreement that removed the Illegality Clause altogether.

While the potential illegality of the ISDA Master Agreement was a concern at the time, the swift response of the ISDA and other regulatory bodies helped to mitigate the risk. Today, the revised agreement is widely used in the derivative market, with the potential issue of illegality largely resolved.