ISDA seeks to address the section 2(a)(iii) insolvency unfairness with respect to derivatives.
Both versions of the ISDA master agreement which are used for over the counter derivatives from small scale interest rate swaps to larger equity derivatives transactions from small scale interest rate swaps to larger equity derivatives transactions include a provision (which is generally not disapplied) that if there is a potential event of default or an event of default (such as a bankruptcy event) in place in respect of the other party (the defaulting party) then (unless automatic early termination applies) the non-defaulting party has the following remedies whilst the event continues namely:
to choose at its option to close out the contract; or to simply suspend making payments under it. The issue
The insolvency mischief has been that, whilst if the non-defaulting party chooses to close out the contract there is generally a full valuation of both party's rights against each other (via loss or market quotation etc.), in the United Kingdom the English courts (particularly in Lomas and others v JFB Firth Rixson Inc and others  EWCA (Civ) 419) have determined that, if a non-defaulting party is out of the money under the contract and simply chooses to suspend making payments then, if the event of default is never cured (and most bankruptcy events of default never are cured), that party can walk away from the contract without any obligation to account for the suspended payments which would have otherwise fallen due from it or been taken into account if it had closed out the contract. That means that, typically, the defaulting party's creditors lose out. By contrast the US courts have found that a party that sought to suspend its...