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International Security Law

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Submitted By zeus722
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1.
Tumble has entered into a derivative contact with Prudent in the form of ISDA standard master agreement in 1992, which is drafted by the International Swap Dealers Association Inc. The Agreement supplemented and modified by an ISDA schedule.

After Tumble insolvency, Prudent Bank claimed that s2a(iii) of ISDA Master agreement permits it to withhold from paying any sum due to Tumble under ISDA contract and under s6(a) of ISDA agreement, Prudent has the right to refuse indefinitely to terminate the ISDA contract. I will review if Prudent has such right according to terms provided in ISDA agreement.

I. Right under Master Agreement?
From the ISDA contract, section 2(a)(iii) provides that the payment obligations specified in each confirmation are subject to 1) Condition precedent that no event of default or potential event of default with respect to the other party has occurred and is continuing, and also 2) Condition precedent that no early termination date in respect of the relevant transaction has occurred. 3) Each other application condition precedent specified in this Agreement

Since the conditions stated in s2a(iii) are the conditions precedent to the payment obligation of the counterparties, if any one of the condition has not been met at any time, there is no payment obligation under any of the trade under the agreement.

For condition 2 and 3, as seen in the schedule, there is no automatic early termination clause and other specified condition precedent and they won’t be in dispute here.

However, condition 1) in s2(a)(iii) makes suspension of payment obligation possible. The definition of event of default is found in s5(a) of ISDA agreement, which includes bankruptcy. In present case, Tumble became insolvent and according to s5(a)(vii), payment obligation of Prudent bank in respect of the transaction were suspended. As

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