Termination Provisions of Swap Agreements

Although documentation of interest and currency swaps has become relatively standard, provisions for termination prior to maturity take various forms. The events of acceleration or termination usually include typical loan default provisions. In addition, there may be a cross-default clause applicable to the debt of a corporate counterparty in swaps with a bank intermediary. Supervening illegality is a common event of acceleration. The most complicated aspect is the treatment of acceleration. Three typical close-out provisions provide compensation for early termination by general indemnity, payment of gain or loss on termination, and payment calculated by a formula. Legal risks are minimized by using reasonable market close-out formulas which, though slanted in favor of the party less at fault, protect both sides.