• ISDA Drafting Tip: Calculation Agent v. Determining Party
  • May 11, 2010 | Author: Kevin M. Page
  • Law Firm: Jackson Walker L.L.P. - Houston Office
  • In negotiating the Master Agreement published by the International Swaps and Derivatives Association (the "ISDA"), there are many issues to keep in mind and potential pitfalls to avoid. The ISDA generally is comprised of numerous documents, including a Schedule to the Master Agreement, a Credit Support Annex, and various commodity annexes, all of which are individually negotiated to form a single, integrated agreement between the parties. The complexity of the ISDA is further compounded when taking into account the differences between the 1992 and 2002 ISDA versions, as well as the nuances contained in the Credit Support Annex and various commodity annexes.

    Jackson Walker is committed to helping our clients understand the ISDA and determine how to best tailor the agreement to meet its specific commercial and credit needs. To that end, we intend to periodically publish drafting tips to address common issues that may come up during the negotiation of the ISDA and other energy trading agreements.

    One such issue relates to the use of the term "Calculation Agent" and "Determining Party" in the 2002 ISDA Schedule.

    Under the ISDA, the Calculation Agent is the party that calculates settlement amounts owing between the parties under a particular transaction for purposes of invoicing. Part 4(e) of both the 1992 and 2002 pro forma ISDA Schedules generally allows the parties to specify the Calculation Agent for purposes of all transactions under the ISDA.

    When using the 2002 ISDA Schedule, however, it has become common for some parties to replace the term "Calculation Agent" in Part 4(e) with the term "Determining Party"—a term used only in the 2002 ISDA. At first glance, such change may not seem significant, as the role of the Determining Party implies a similar function as the role of the Calculation Agent (i.e., determining amounts due between the parties with respect to invoices). However, a "Determining Party" under the 2002 ISDA is defined as the party that calculates the Close-out Amount (i.e., the liquidated value of all transactions upon a termination of the ISDA). Thus, the Determining Party’s calculations directly impact the Early Termination Amount owed between the parties upon termination of the ISDA.

    If a party specifies in the ISDA Schedule that it is the Determining Party for purposes of the agreement, such election implies that only that party is entitled to calculate the Close-out Amount upon termination of the agreement. This could be particularly problematic if the Determining Party specified in the Schedule also happens to be a Defaulting Party with respect to an Event of Default or an Affected Party with respect to a Termination Event.

    Instead of electing a Determining Party in Part 4(e) of the ISDA Schedule, the parties should rely on the industry-standard language contained in Section 6(e) of the form 2002 ISDA Master Agreement which generally provides that the Non-Defaulting Party or the non-Affected Party determines the Close-out Amount.