Termination Clause

A A A

DEFINITION

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



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 to be ended early. ...
  2. Debt For Bond Swap

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

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

    A swap that involves the exchange of principal and interest in one currency ...
  5. Forward Swap

    A swap agreement created through the synthesis of two swaps differing in duration ...
  6. Interest Rate Swap

    An agreement between two parties (known as counterparties) where one stream ...
  7. Total Return Swap

    A swap agreement in which one party makes payments based on a set rate, either ...
  8. Rollercoaster Swap

    A seasonal swap providing flexibility of payments at predetermined periods to ...
  9. Swap

    Traditionally, the exchange of one security for another to change the maturity ...
  10. International Swaps and Derivatives ...

    An association created by the private negotiated derivatives market that represents ...
Related Articles
  1. The Barnyard Basics Of Derivatives
    Investing Basics

    The Barnyard Basics Of Derivatives

  2. Are Derivatives Safe For Retail Investors?
    Options & Futures

    Are Derivatives Safe For Retail Investors?

  3. An Introduction To Swaps
    Options & Futures

    An Introduction To Swaps

  4. The Advantages Of Bond Swapping
    Bonds & Fixed Income

    The Advantages Of Bond Swapping

  5. The Evolution Of ETFs
    Mutual Funds & ETFs

    The Evolution Of ETFs

  6. How Companies Use Derivatives To Hedge ...
    Active Trading

    How Companies Use Derivatives To Hedge ...

  7. Credit Default Swaps: What Happens In ...
    Insurance

    Credit Default Swaps: What Happens In ...

  8. ISDA Master Agreement
    Investing Basics

    ISDA Master Agreement

  9. Derivatives 101
    Fundamental Analysis

    Derivatives 101

  10. A Guide To Real Estate Derivatives
    Bonds & Fixed Income

    A Guide To Real Estate Derivatives

comments powered by Disqus
Hot Definitions
  1. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  2. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  3. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  4. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
  5. Negative Carry

    A situation in which the cost of holding a security exceeds the yield earned. A negative carry situation is typically undesirable because it means the investor is losing money. An investor might, however, achieve a positive after-tax yield on a negative carry trade if the investment comes with tax advantages, as might be the case with a bond whose interest payments were nontaxable.
  6. Rounding Bottom

    A chart pattern used in technical analysis, which is identified by a series of price movements that, when graphed, form the shape of a "U". Rounding bottoms are found at the end of extended downward trends and signify a reversal in long-term price movements.
Trading Center