Credit Default Swap Agreement

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					International Swaps and Derivatives Association, Inc.

            Understanding the
      1992 ISDA Master Agreements

                    Hotel Inter-Continental
                         Sao Paulo
                            Brazil

                       August 6, 2002

 Thomas J. Werlen    Rui Fernando Ramos Alves     Luciana Fuser Bittar
     Partner         Head of Legal Department      Head of Legal and
                                                     Compliance
  Allen & Overy         Deutsche Bank AG
                                                Merrill Lynch & Co., Inc.
1984        1985         1986                 1987                     1989           1990          1991

ISDA       Code of      1986 Code    - Interest Rate and Currency     Cap, Collar     Option        Revised
Formed     SWAPS        of SWAPS       Exchange Agreement             and Floor       Addendum      Definitions
           (Standard                 - Interest Rate and Currency     Addendum                      (1991
           Wording,                    Exchange Definitions                                         Definitions)
           Assumptions               - Interest Rate Swap Agreement
           and Provisions              -                              User’s Guide to ISDA
           for Swaps)

     1992                     1993                         1994                           1995
- Master Agreement       - User’s Guide to 1992       - Credit Support Annex        - User’s Guide to the
  (Multicurrency-Cross     ISDA Master                  (New York law)                ISDA Credit Support
  Border) & (Local         Agreements                 - OTC Single Share              Annex (New York law)
  Currency-Single        - OTC Bond Option              Option (Physical            - Equity Option
  Jurisdiction)            Confirmation (Long Form)     Settlement) Confirmation      Definitions and
- U.S. Municipal         - Commodity Derivatives        (Long Form)                   Confirmations
  Counterparty             Definitions and                                          - Credit Support Annex
  Definitions and          Confirmations                                              (Transfer - English law)
  Confirmations                                                                     - Credit Support
- FX and Currency                                                                     Deed (Security Interest -
  Option Definitions                                                                  English law)
  and Confirmations
- OTC Equity Index
  Option Confirmation
  (Long Form)
               1996                                        1997                                    1998

 - 1996 Equity Derivative Definitions        - 1997 Bullion Definitions            - 1998 FX and Currency
 - Credit Support Annex (Japanese            - 1997 Credit Swap Confirmation          Option Definitions
Law)                                         - 1997 Government Bond Option         - 1998 Supplement to the
 - User’s Guide to the Credit                   Definitions                           1991 Definitions
   Support Annex (Japanese Law)                                                    - 1998 Euro Definitions
 - Chinese Character Translations of                                               - EMU Protocol
the
   1993 User’s Guide to the 1992
ISDA
   Master Agreements
 - 1996 ISDA Representation
Regarding
            1999
   Relationship between Parties           2000                                        2001
 - ISDA / BBAIRS Bridge
 - ISDA / FRABBA Bridge
 - 1999 User’s Guide to       - 2000 Definitions          - 2001 Margin Provisions and User’s Guide
   the 1995 Credit Support    - Supplement to             - 2001 Euro Protocol
   Annex (English law) and       the 1993                 - Form of Amendment to 1992 ISDA Master Agreements
   the 1995 Credit Support       Commodity                - U.S. Payee Tax Representations
   Deed (English law)            Derivatives              - Restructuring Supplement to 1999 Credit Derivatives
 - 1999 User’s Guide to          Definitions              Definitions
   the 1998 FX and            - Revised Annex A           - Supplement to 1999 Credit Derivatives Definitions Relating
   Currency Option               to the 1998 FX           to Convertible, Exchangeable or Accreting Obligations
   Definitions                   and Currency             - Supplement Relating to Successor and Credit Events to
 - 1999 Credit Derivatives       Option Definitions       1999 Credit Derivatives Definitions
   Definitions                - EMU Protocol              - 2001 Cross-Agreement Bridge
 - Y2K Review                    (Greece)                 - Chinese Character Translation of 1992 ISDA Master
                                                          Agreement                                               3
                                        Recent Documentation
                                           Developments
               2001 Margin Provisions and User’s Guide
               2001 Euro Protocol
               Supplements to 1999 Credit Derivatives
                Definitions
               Form of Amendment to 1992 ISDA Master
                Agreements
               2001 Cross-Agreement Bridge
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                   ISDA Agreement Structure 2002
 Credit Support Documents:              Confirmations (long form)               October 2001 Form of Amendment to
    offering protection against                                                 1992 Master Agreements
    credit risk
  2001 ISDA Margin Supplement
                                            1992 Master Agreement               2001 Cross-Agreement Bridge
    (incorporating 2001 ISDA
                                            (Multicurrency-Cross Border)
    Margin Provisions)
 • 1995 Credit Support Annex               Governs the legal and credit
                                                                                Definitions: for use in documenting
    (Transfer – English Law)                relationship of the parties
                                                                                  Transactions
 • 1994 Credit Support Annex               Includes representations, events
                                            of default/termination events and      2000 Definitions (replace the
    (New York Law)                                                                  1991 Definitions (as amended by the
                                            covenants
                                           Incorporates Confirmations              1998 Supplement)
 1995 Credit Support Deed                  Schedule used to make changes to       1999 Credit Derivatives
 (Security Interest – English Law)          standard provisions                     Definitions (plus Supplements)
 1996 Credit Support Annex                                                         1998 Euro Definitions
 (Japanese Law)                                                                    1998 FX and Currency Option
                                                                                    Definitions (plus revised Annex A)
                                                                                   1997 Bullion Definitions
 Protocols: amending Master                 Confirmations (short form)
                                                                                   1997 Government Bond Option
   Agreement                               Incorporate Definitions                 Definitions
 •   2001 Euro Protocol                    Specify economic terms of each
                                                                                   1996 Equity Derivatives Definitions
 •   2001 Credit Support Protocol           transaction
                                                                                   1993 Commodity Derivatives
                                           Include Transaction-specific
 •   2000 EMU Protocol (Greece)                                                     Definitions (as amended by the
                                            modifications
 •   1998 EMU Protocol                                                              2000 Supplement)
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                                        ISDA User’s Guides

                 User’s Guide to the 1992 ISDA Master Agreements
                 User’s Guide to the 1994 ISDA Credit Support Annex
                 User’s Guide to the 1995 ISDA Credit Support Annex
                  (Security Interest - Japanese Law)
                 User’s Guide to the ISDA Credit Support Documents
                  under English Law
                 User’s Guide to the 1998 FX and Currency Option
                  Definitions
                 User’s Guide to the 2001 ISDA Margin Provisions
       NB: various other “Commentaries” are available
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                 ISDA Master Agreements
             1992 and 1987 Versions Compared

          Three especially important changes:
                    Section 1(c) - Single Agreement
                    Section 2(c) - Netting
                    Section 6(e) - Payments on Early Termination



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                                        Section 1 - Interpretation


                                            Interpretive Priority
                                            Single Agreement




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                  Section 2 - Payment and Delivery
                              Obligations

                                           Conditions Precedent
                                           Change of Account
                                           (Payment) Netting
                                           Tax Withholding/Gross-Up
                                           Default Interest/Other Amounts


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           On-Going (Payment) Netting - Section
                          2(c)
                 (Not Close-out Netting)


                                          Gross:
                                           $100
             Party                                   Party
              A                          Net: $75     B
                                        Gross: $25



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                             Section 3 - Representations

                            Purposes: Facilitate Due Diligence
                                         Establish Factual Underpinnings of
                                         Agreement

                            Remedies: Event of Default/Liquidation
                                         Agreement Measure of
                                         Damages/Other Remedies




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Section 3 - Representations (cont.)

   Basic Representations
   Absence of Certain Events
   Absence of Litigation
   Accuracy of Specified Information
   Tax Representations
   Additional Non-Standard Representations


                                              12
                                        Section 4 - Agreements

                                       Purpose/Remedies
                                       Furnish Specified Information
                                       Maintain Authorizations
                                       Comply with Laws
                                       Tax Agreement
                                       Payment of Stamp Tax

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                                        Events of Default
                                           Section 5(a)
                Section 5(a)(i)           Failure to Pay or Deliver
                Section 5(a)(ii)          Breach of Agreement
                Section 5(a)(iii)         Credit Support Default
                Section 5(a)(iv)          Misrepresentation
                Section 5(a)(v)           Default under Specified Transaction
                Section 5(a)(vi)          Cross Default
                Section 5(a)(vii)         Bankruptcy
                Section 5(a)(viii)        Merger Without Assumption
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                                           Default under
                                        Specified Transaction
                                          Section 5(a)(v)

                Specified Transaction (defined in Section 14)
                           means derivatives transactions outside ISDA
                           between

          PARTY A                                      PARTY B
          Credit Support Provider               and    Credit Support Provider
          Specified Entity                             Specified Entity

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                                        Cross Default

                                        Section 5(a)(vi)

                           Default in respect of borrowed money
                           Threshold Amount




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                                                Bankruptcy
                                               Section 5(a)(vii)

                                           Insolvency-related events
                                           Actual liquidation
                                           Actions by a secured party




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                                        Termination Events
                                           Section 5(b)
          Section 5(b)(i)                     Illegality
          Section 5(b)(ii)                    Tax Event
          Section 5(b)(iii)                   Tax Event Upon Merger
          Section 5(b)(iv)                          Credit Event Upon
            Merger
          Section 5(b)(v)                     Additional Termination Event

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                            Netting Legislation as of 2002
                            Adopted:        Adopted (cont’d)
                            1. Australia    12. Japan
                            2. Austria      13. Luxembourg
                            3. Belgium      14. Mexico
                            4. Canada
                                            15. New Zealand
                            5. Denmark
                            6. Finland
                                            16. Norway
                            7. France       17. Poland
                            8. Germany      18. Portugal
                            9. Hungary      19. South Africa
                            10. Ireland     20. Spain
                            11. Italy       21. Sweden
                                            22. Switzerland
                                            23. United States

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                            Netting Legislation as of 2002

                       Pending:
                       1.               Brazil
                       Under Consideration:
                       1. The Czech Republic
                       2. U.S. Improvements




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                      ISDA Netting Opinions 2002
             1.          Australia        15. Indonesia             29. South Africa
             2.          Austria          16. Ireland               30. South Korea
             3.          Bahamas          17. Italy                 31. Spain
             4.          Belgium          18. Japan                 32. Sweden
             5.          Bermuda          19. Luxembourg            33. Switzerland
             6.          British Virgin   20. Malaysia              34. Taiwan
                         Islands          21. Mexico                35. Thailand
                 7. Canada                22. Netherland Antilles   36. Turkey
                 8. Cayman                23. New Zealand           37. The
                         Islands          24. Norway                    Netherlands
                 9. Denmark               25. Philippines           38. United States
                 10. England                                        In Draft:
                                          26. Portugal
                 11. Finland                                        1. Hungary
                                          27. Scotland
                 12. France               28. Singapore
                 13. Germany
                 14. 7/31/2010
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                                        Early Termination
                TERMINATION MECHANICS: How to Terminate
                Reason                               Who may terminate
                Events of Default
                     Bankruptcy                        Non-defaulting Party or Automatic*
                     Other                             Non-defaulting Party

                Termination Event
                     Illegality                        either party
                     Tax Event Upon Merger             Burdened Party
                     Tax Event                         Affected Party
                     Credit Event Upon Merger          non-Affected Party
                     Additional Termination Event      non-Affected Party or either party (if
                                                         there are two Affected Parties)


            1992 ISDA Master Reference                           *only applies if elected in Schedule
            Sections 6(a) + (b); Pages 8-9
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                                        Early Termination

                            TERMINATION MECHANICS: Effect of Termination

          Event of Default                           all Transactions terminated
          Credit Event Upon Merger                   all Transactions terminated
          Additional Termination                     all Transactions terminated
          Event                                       (presumption)
                                                     only Affected Transactions
          Other Termination Events

              1992 ISDA Master Reference
                  Section 6(c); Page 9

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                                Early Termination Payment

         Components
                                   SETTLEMENT AMOUNT: net value of amounts
                                   (based on Market Quotation or Loss) which would
                                   have been payable under each Terminated
                                   Transaction after the Early Termination Date
                                   (“ETD”) had there not been an ETD (this may be
                                   owed by or to the determining party)
         Plus                      UNPAID AMOUNTS owed to the determining party
                                   on or before the ETD
         Less                      UNPAID AMOUNTS owed by the determining party
                                   on or before the ETD.

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                                                            Timeline
   The following diagram gives an example of how certain payments would fall within Unpaid
   Amounts and how others would fall within Market Quotation where there are two swaps and
   Party B is the Defaulting Party.


Thursday                    Monday          Tuesday         Thursday         Monday         Wednesday           Friday

January 7                   January 11      January 12      January 14       February 8     February 10         February 12

Swap 1                      Party A gives   Swap 2          Party B’s        Party A        Early Termination   Swap 2
Payment Date:               notice of       Payment Date:   failure to pay   designates     Date.               scheduled
Party B                     failure to      Party A would   on January 7     February 10    Also Swap           Payment Date.
owes $150,000               Party B.        have owed       becomes          as the Early   1 Payment Date:     Party A
and fails                                   $75,000.        Event of         Termination    Party B owes        would have
to pay.                                                     Default.         Date.          $100,000.           owed $75,000.




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                                        Timeline (cont’d)
       Market Quotation                       Unpaid Amounts

       includes discounted value of           includes amount Party B failed to pay on
       payment scheduled for February 12,     January 7.
       as well as replacement value (based    includes amount Party A did not have to pay on
       on Market Quotations) of all           January 12 (failure to satisfy condition
       subsequent payments due under          precedent that there be no Event of Default or
       Swaps 1 and 2.                         Potential Event of Default).
                                              includes the payment scheduled for
                                              February 10 (would have been payable on Early
                                              Termination Date).
                                              excludes the payment scheduled for
                                              February 12 even though portion of relevant
                                              calculation period has run as of Early
                                              Termination Date.

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                                Early Termination Payment
                       Components
                                                Swap 1       Swap 2
                       Market Quotation
                       (determined by Party A) $1,100,000 ($1,400,000)

                       Unpaid Amounts
                       payable to Party A        150,000        -
                                                 100,000
                       Unpaid Amounts
                       payable to Party B           -         75,000

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                                Early Termination Payment

    Calculation
    Sum of Market Quotations                     $1,100,000
    (Settlement Amount)                          (1,400,000)
                                                               ($300,000)
    Plus Unpaid Amounts payable to Party A         150,000
                                                   100,000

               250,000
    Less Unpaid Amounts payable to Party B         (75,000)
                                                                 (75,000)
                                                               ($125,000)
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                                Early Termination Payment

           Result
           if First Method is chosen:        no payment is due to
                                             either party

           if Second Method is chosen: Party A pays $125,000 to
                                       Party B




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                                 Early Termination Payment

              Possible Combinations
              Events of Default
                           First Method/Market Quotation
                           First Method/Loss
                           Second Method/Market Quotation
                           Second Method/Loss
              Termination Events
                           Market Quotation (One Affected Party)
                           Loss (One Affected Party)
                           Market Quotation (Two Affected Parties)
                           Loss (Two Affected Parties)

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                                  Lessons from 1998 Market
                                        Disruptions

               Close-out and valuation procedures did not
                work perfectly
                           Market Quotation: difficult to obtain 4
                            quotations
                           Loss: difficult to determine when it would be
                            commercially reasonable to revert to this
                            method (if Market Quotation elected)

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                                         Close Out Amount

               Close Out Amount overriding principle is good
                faith and commercial reasonableness.
                           combines elements of both Market Quotation
                            and Loss
                           maximizes flexibility of Non-defaulting Party
                           does not require strict procedures of Market
                            Quotation


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                                     ISDA Master Agreement
                                  Illegality and Force Majeure
              Illegality: events beyond parties’ control that
               result from changes in laws or government
               orders: Section 5(b)(i)

              Force Majeure Event: events beyond parties’
               control that fall outside Illegality but still hinder
               or prevent performance of party’s obligations:
               Section 5(b)(ii)

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                                    ISDA Master Agreement:
                                  Illegality and Force Majeure
                      Illegality and Force Majeure Event:
                 • Subject to waiting period – only becomes
                   Termination Event once waiting period expires
                 • Illegality waiting period: three Local Business Days
                 • Force Majeure Event waiting period: eight Local
                   Business Days




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                                         ...And last but not
                                        (necessarily) least:
                             Section 7          -   Transfer
                             Section 8          -   Contractual Currency
                             Section 9          -   Miscellaneous
                             Section 10         -   Multibranch
                             Section 11         -   Expenses
                             Section 12         -   Notices
                             Section 13         -   Governing Law
                             Section 14         -   Definitions
                             Testimonium
                             Signature blocks

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                                        Multibranch

                                                        Party B
                                        Swap 1         (London
                                                      Head Office)
             Party A
           (Frankfurt)
                                        Swap 2           Party B
                                                      (Paris Branch)


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                                        ISDA Schedule
                  Part 5 - Other Provisions to Consider
           set-off                      impossibility
           credit downgrading           “non-reliance” representation
           escrow arrangements          recording of conversations
           payment deferral
           no occurrence of Events of
            Default/Termination Events in
            specified circumstances
     Note: This list is not exhaustive! But consider which are really needed
     and whether additional length and complexity of Schedule is worth
     possibly prolonged negotiation time and therefore increased
     documentation risk while Master Agreement remains unsigned.

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                                        Basic Set-Off - Version 1



                            PARTY A                        PARTY B




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             Set-off (Parties and their Affiliates) -
                           Version 2


                        PARTY A          PARTY B
                           +                +
                       AFFILIATES       AFFILIATES




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                            Downgrading of Credit Rating
                            (as an Additional Termination Event)

                  Reduction in the long-term debt rating by
                   Standard & Poor’s and/or Moody’s
                  In the opinion of one Party, the
                   creditworthiness of the other Party is
                   materially weaker




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                                        Escrow Arrangements

                Time difference or other reasons simultaneous
                 payment on any day on which both parties are
                 required to make payments is not possible
                Appointment of escrow agent
                Earlier payment to be deposited with escrow agent
                 and irrevocable payment instructions
                Costs of escrow arrangement
                Interest on deposited payment, if not released to
                 intended recipient on the same date

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                                        Payment Deferral

                       Different payment dates for both parties
                       Material adverse change in the financial
                        condition of the intended recipient
                       Payment deferred until the day on which a
                        payment is due from the intended recipient
                       Payment of deferred amount + interest


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                                        Impossibility

                       Natural or man-made disaster, armed
                        conflict, act of terrorism, other
                        circumstances beyond control of the parties
                       Additional Termination Event
                       New Force Majeure Termination Event



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                                Non-Reliance Representation
(a)        Relationship Between Parties. Each party will be deemed to represent to the other party on the date on
which it enters into a Transaction that (absent a written agreement between the parties that expressly imposes
affirmative obligations to the contrary for that Transaction):

            (i)         Non-Reliance. It is acting for its own account, and it has made its own independent decisions
to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own
judgment and upon advice from such advisers as it has deemed necessary. It is not relying on any communication
(written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction; it being
understood that information and explanations related to the terms and conditions of a Transaction shall not be
considered investment advice or a recommendation to enter into that Transaction. No communication (written or
oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of that
Transaction;

            (ii)       Assessment and Understanding. It is capable of assessing the merits of and understanding
(on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions
and risks of that Transaction. It is also capable of assuming, and assumes, the risks of that Transaction; and

            (iii)                 Status of Parties. The other party is not acting as a fiduciary for or an adviser to it in respect
of that Transaction.
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DOCUMENT INFO
Description: Credit Default Swap Agreement document sample