This analysis will be discussed by LSREF III Wight Limited v. Millvalley Limited, in which the parties argued over whether a swap confirmation had been settled by the 1992 or 2002 International Swap and Desivas Association (ISDA) master agreements. The case contains a particularly interesting debate on the difference between construction and rectification. It also shows the potential pitfalls of using long-term confirmations. The printed form of the captain`s contract is never changed on the surface of the document. In negotiations, it is not even exchanged, assuming that standard conditions are always used. There are different types of credit support documentation created by ISDA. Among the most important distinctions between them are their current legislation (English, New York and Japanese) and the nature of the transfer of collateral (transfer of ownership and interest on securities). The 2002 form contains compliant amendments to deal with events of illegality and force majeure. A significant change is the calculation of the amount of the transaction that ends prematurely due to a delay event or termination event. In the 1992 form, the final amount of a transaction was determined by the market quotation (required by distributors` offers) or the loss (which was the finding of a party`s loss or profit) as determined in the timing of the master contract. The changes to the methodology of the amount of financial statements were motivated by doubts that, under stressed market conditions, it might be difficult to obtain meaningful ratings and that the “Loss” standard was too subjective.
In the 2002 form, the amount of financial statements is the amount of losses or costs or profits (as appropriate) in the current circumstances, replacing or providing for the economic equivalent of the essential terms of the terminated transactions and potential option rights. With respect to determining the amount of the “close-out,” the determining party (i.e. the party determining the amount of the close-out) is accused of acting in good faith and applying economically appropriate procedures to achieve an economically reasonable result. Subject to this standard, the determining party may consider all relevant information, including third-party offers, market data provided by third parties, and certain types of information generated internally. The determining party must take into account offers or market data provided by third parties, unless it considers in good faith that they are not readily available or do not meet the “commercially appropriate” standard. The framework contract is quite long and the negotiation process can be difficult, but once a framework contract is signed, the documentation of future transactions between parties will be reduced to a brief confirmation of the essential terms of the transaction. This only applies to the 1992 masteragrement. The 2002 Master Agreement rejected the first and second methods. In practice, the first method was very rarely chosen, as the financial institutions concerned had to declare their gross commitment and not the net commitment under the masteragrement. The 2002 Master Agreement also replaced the distinction between market quotation and loss with a single concept, “Close-out Amount.” This transaction is intended for each transaction completed and is, on the whole, the profit or loss that would result from the conclusion of an equivalent transaction at the time of the early termination. The aggregate of close-out and unpaid amounts is called “notice.” This is the net amount payable from one party to the other for terminated transactions.
The provision of the “comprehensive agreement” contained in the 2002 form was supplemented by (i) an explicit recognition of the absence of assurances (other than those provided under the captain`s contract) and (ii) an explicit waiver of all rights and remedies (except fraud).