Termination Clause

AAA

DEFINITION of 'Termination Clause '

A section of a swap contract that describes what will happen if the contract is ended early or defaulted on. The termination clause can make the counterparty who is responsible for the default or termination event pay damages to the other counterparty. The agreement value method, formula method or indemnification method can be used to calculate these damages, called "termination payments". When a swap is terminated early, both parties will cease making the agreed-upon payments.



INVESTOPEDIA EXPLAINS 'Termination Clause '

Counterparties using the International Swaps and Derivatives Association's master swap agreement can take advantage of the termination clause that is already written into that agreement. Possible termination events include legal or regulatory changes that prevent one or both parties from fulfilling the contract terms ("illegality"), the placement of a withholding tax on the transaction ("tax event" or "tax event upon merger"), or a reduction in one counterparty's creditworthiness ("credit event"). Failure to pay or a declaration of bankruptcy by either party are examples of default events.

RELATED TERMS
  1. Termination Event

    An occurrence that will cause all or part of a swap agreement ...
  2. Debt For Bond Swap

    A debt swap involving the exchange of a new bond issue for similar ...
  3. Credit Default Swap - CDS

    A swap designed to transfer the credit exposure of fixed income ...
  4. Currency Swap

    A swap that involves the exchange of principal and interest in ...
  5. International Swaps and Derivatives ...

    An association created by the private negotiated derivatives ...
  6. Swap

    Traditionally, the exchange of one security for another to change ...
RELATED FAQS
  1. How can an investor terminate a derivative contract?

    Most derivatives contracts have provisions allowing for early termination and netting out the initial investment. The early ... Read Full Answer >>
  2. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  3. Should you calculate Value at Risk (VaR) for counterparty credit risk?

    Value at risk (VaR) calculations may be helpful for risk management when trading credit default swaps and other derivatives ... Read Full Answer >>
  4. For what financial instruments is a modified duration relevant?

    The modified duration is a formula used to calculate the percent change in the price of a financial instrument when there ... Read Full Answer >>
  5. What is the difference between derivatives and swaps?

    Derivatives are securities with prices dependent on one or multiple underlying assets. Common derivatives include forward ... Read Full Answer >>
  6. Why is tenor important on credit default swaps?

    Tenor – the amount of time left on a debt security's maturity – is important in a credit default swap because it coordinates ... Read Full Answer >>
Related Articles
  1. Insurance

    Credit Default Swaps: What Happens In A Credit Event?

    The credit crisis of 2008 prompted important changes to the settlement of credit default swaps.
  2. Investing Basics

    The Barnyard Basics Of Derivatives

    This tale of a fictional chicken farm is a great way to learn how derivatives work in the market.
  3. Options & Futures

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.
  4. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  5. Bonds & Fixed Income

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  6. Mutual Funds & ETFs

    The Evolution Of ETFs

    Average and cautious investors can experience lower risk with ETFs - a safer alternative to swaps and derivatives.
  7. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  8. Investing Basics

    Explaining Currency Swaps

    A swap that involves the exchange of principal and interest in one currency for the same in another currency.
  9. Investing

    How To Read Interest Rate Swap Quotes

    Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes
  10. Economics

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.

You May Also Like

Hot Definitions
  1. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  2. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  3. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  4. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  5. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  6. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!