As shown in the table above, the number of EoD/termination events under Isda is much higher than those under NBP or ZBT. What the diagram does not convey, however, is that they are also much larger in width. Differences can be of great importance to a party`s termination rights. Insolvency is an excellent example of these differences, as Article 5(a)(vii) of isda is much broader and more sensitive than the corresponding provisions of the NBP/ZBT, as it covers most forms of insolvency-related events22 in many jurisdictions, including non-payment of debts on due date, self-opening of insolvency proceedings/applications, and taking possession of the assets of the defaulting party. The second area of interest is the mechanics of notes. To ensure that back-office procedures can be streamlined and that different notification rules do not have to be followed for each type of transaction in which a user is involved, the standard provisions of Isda notification are used. This change changes when a notification is considered effective and what types of notifications are allowed. The Isda also contains a much broader list that more accurately reflects the communication methods of companies in 2004 than the NBP or ZBT. The appendix also gives users the choice to classify violations of NBP/ZBT terms as EoD or ATE. However, whether an ATE or EoD is chosen, a breach will result in the termination of all transactions inside and outside the Annex as long as they are covered by the relevant ISDA.26 Thus, the operational risks of a material breach of the NBP/CBT are not “isolated” from other risks without further adjustment. This may be of some importance to parties who wish to use Isda to market a variety of products where the risk of breach of the NBP/ZBT terms may not justify termination of the relationship as a whole. This inability to isolate risks is often cited by some counterparties as a reason to avoid the use of notes. However, this so-called portfolio default risk can be minimised by amending the definition of `affected transaction` in Section 14 of the Isda so that, for the purposes of the ATEs set out in the Annex, the only transactions concerned are NBP/ZBT transactions.
This prevents an NBP/ZBT failure from excluding all unaffected transactions. 27 Users should also be aware that the choice between an EoD and an ATE may have other effects, including the availability of performance compensation under Article 11 of the Isda, which applies only to EoDs, and the possibility that an event may be covered by certain non-transaction clauses in non-Isda agreements, such as loans or direct debit agreements. FM coverage under the 2002 Isda is much wider than that under the NBP, but is arguably narrower than that under the ZBT. It should be noted that under Isda 2002, the FM applies to all transactions under Isda, but under the NBP and ZBT, the FM will likely only apply to unmodified futures, as the concept of options under these agreements does not exist. Fm under Isda 2002 covers any event beyond the control of a party and prevents payment/delivery or performance under a credit support document. In contrast, fm under the NPP focuses solely on the inability of a transco party or company to make commercial appointments. Unlike Isda 2002, ZBT FM focuses on whether a party can meet its obligations under the ZBT using the concept of a reasonable and prudent operator. ZBT FM is also broader than the 2002 Isda, which covers both events that affect the party itself and events that affect facilities immediately before or after the Zeebrugge Hub. These differences in scope are in addition to the different waiting periods before the conclusion of transactions that exist between the three schemes and can therefore lead to cases where FM can be notified under one system but not the other. The annex was published by Isda in March 2003. The objective of the annex is to create a tool to integrate existing and future advances and options under the BNP and the ZBT under Isda.
The creation of the Annex was mainly motivated by the need to update the BNP and ZBT, combined with the desire to reduce the plethora of agreements with which counterparties negotiate. 5 This problem is particularly acute in the continental European natural gas market, where each gas hub has its own documents and commercial conditions. The result of this hodgepodge of documentation is not only a high barrier to entry, as a lot of time and money must be spent tailoring each set of terms to each counterparty, but also different types of legal and credit risks. These risks arise from the fact that several agreements between two particular counterparties may contain very different applicable credit/tax/closing and legal provisions, although the credit risk between the two parties is not affected by the document with which the transaction takes place from a credit perspective. This multitude of documents is reinforced by the fact that many of the agreements are orphaned in the sense that they do not have supporting associations to coordinate regular updates to reflect changes in the market and seek legal advice on their effectiveness. The NBP is a perfect illustration of this since it was published in 1997 and has not been revised or republished since. While BNP remains historically attractive as a start-up negotiation condition for UK gas, its provisions now ignore the options market, the rise of single-deal architecture and even day-to-day issues such as the Contracts (Third Party Rights) Act 1999. This concept of a single agreement is an integral part of the structure and compensation-based protection offered by the framework agreement. The fact that all transactions are the only contract enhances the ability to complete these transactions and determine a single net amount to be paid in the event of default. When using the Annex in conjunction with the 1992 Isda, Force Majeure (FM) can be adopted from the NBP/ZBT Conditions without fear of conflict with the existing provisions of the 1992 ISDA. Isda 1992 does not contain its own VHF provisions (see Table 3 above).
Nevertheless, the parties have yet to consider how FM should operate, i.e. whether FM`s statement should be an EoD, a termination event, or a no-fault termination. This is the thrust of part (d)(v), which asks users to check whether they want fm to be a termination event with two parties involved and whether they want it to trigger a termination payment. The concept of payment to FM constitutes a material breach with the NBP and ZBT if FM results in a “walkout” situation in which neither party receives compensation for the remaining value of the order for the relevant transactions. We would like to ask the users of the annex to consider whether such a takedown approach really sums up the commercial reality of the situation. This choice must be weighed against the baseline risk for NBP transactions outside of banknotes for which no payment is due when fm occurs. The following sentence in the introductory sentence reads: “This framework agreement and this 2002 timetable are collectively referred to as this `framework agreement.`” It is redundant, as is the defined term “framework agreement” because the previous sentence indicates that the framework agreement contains the timetable. There are two versions of the framework agreement, the local version for transactions between parties in the same jurisdiction that transact in a single currency, and the multi-currency version to be used when the parties are in different jurisdictions and transact in different currencies. The provisions included in the multi-currency version, but not in the local currency version, relate to issues such as taxes, payment currency, using multiple offices to conduct transactions, and appointing an agent to run the process. [a] The purpose of this article is to highlight the need for a reassessment of the documentation on the basis of which physical raw materials are traded on the two main European physical gas nodes: the National Equilibrium Point in the United Kingdom and the Zeebrugge hub in Belgium. This need is particularly urgent given the experience of Enron and TXU Europe.
One of the instruments available to commodity traders is the European Gas Annex 2, published by the International Swaps and Derivatives Association (Isda) 3 (the “Annex”). The annex allows traders to host all of their portfolios, both physical and financial, under a common platform backed by legal advice and accompanying documents and subject to a stress test in a variety of markets and conditions. .