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Market Disruption Events and Disruption Fallbacks under 2005 ISDA Commodity Definitions

Market Disruption Events (“MDE”) and Additional Market Disruption Events (“AMDE”)

Parties to a commodity transaction may specify that certain MDEs or AMDEs apply. Certain MDEs or AMDEs may also be applicable by default under section 7.4(d) of the Commodity Definitions. If a MDE or AMDE occurs, (a) an alternative basis of determining the Relevant Price in respect of a specified Commodity Reference Price will be made in accordance with the applicable Disruption Fallback or (b) termination of the Transaction will occur (if the MDE or AMDE occurs on the Pricing Date)

Default MDE/ADME Provisions

Unless otherwise indicated by the parties, the following MDE/AMDE will be deemed to apply:

Bullion Transaction:

  • (i) Price Source Disruption,
  • (ii) Trading Disruption and
  • (iii) Disappearance of Commodity Reference Price

A Transaction other than a Bullion Transaction:

  • (i), (ii), (iii) above and
  • (iv) Material Change in Formula
  • (v) Material Change in Content

These default provisions do not apply if at least one MDE is specified. If one or more AMDEs are specified, the AMDE(s) specified shall apply in addition to the MDEs deemed to be applicable.

If a MDE/ADME occurs/exists on the pricing date, the Relevant Price will be determined in accordance with the first Disruption Fallback that provides the parties with (a) a Relevant Price or (b) if there is no such Relevant Price, termination of the transaction.

DMEs

Price Source Disruption

A Price Source Disruption occurs where:

  • the price source fails to publish the Specified Price
  • the price source is unavailable for discontinued
  • there is a failure to obtain at least three quotations (where “Commodity-Reference Dealers” applies) or
  • the Specified Price differs from the Specified Price determined by the Price Materiality Percentage specified

    Trading Disruption

    A Trading Disruption occurs if trading in the Futures Contract or the commodity is suspended or limitation is imposed on trading

    Disappearance of Commodity Reference Price

    Disappearance of Commodity Reference Price occurs when, notwithstanding the availability of the price source, the Commodity Reference Price is discontinued, disappeared or the trading in the commodity or futures contracts is discontinued

    Material Change in Formula

    This happens when there is a material change in the formula or method of calculating the relevant Commodity Reference Price

    Material Change in Content

    This happens when there is a material change in the content, composition of the commodity or futures contract

    Tax Disruption

    This occurs when the imposition, change or removal of tax causes the price to change

    Disruption Fallbacks

    A Disruption Fallback will apply to a transaction if it is specified or deemed to be so pursuant to section 7.5(d).

    Disruption Fallbacks that allows an alternative price to be determined includes “Fallback Reference Dealers”, “Fallback Reference Price”, “Negotiated Fallback”, “Postponement”, “Calculation Agent Determination” and “Delayed Publication or Announcement”.

    No Fault Termination” allows the parties to terminate the transaction under circumstances similar to e.g. a force majeure event and will take effect if none of the Disruption Fallbacks produces the parties with a price on the pricing date.

    Default Disruption Fallbacks

    Fallback Reference Price” (if alternative commodity reference price is specified), “Delayed Publication or Announcement”, “Postponement”, “Fallback Reference Dealers”, “No Fault Termination” are the default Disruption Fallbacks.

    In addition, “Negotiated Fallback” is deemed to be applicable in conjunction with “Delayed Publication or Announcement” and “Postponement” (whether these Disruption Fallbacks are specified or deemed to be applicable under 7.5(d)(j).

    July 2005

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    The above notes are intended to provide only general outlines and should be read in conjunction with, and are qualified in their entirety by, the full provisions of the relevant ISDA provisions and definitions. They should never be used in place of professional advice. We accept no responsibility for any loss arising from any action taken or not taken by anyone using this material or using this material in conjunction with any ISDA documentation in reliance thereof.

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