Termination Event

DEFINITION of 'Termination Event'

An occurrence that will cause all or part of a swap agreement to be ended early. 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").


A termination even can also relate to business agreements between multiple parties. If one of the members takes a course of action which is deemed inappropriate, that could serve as a termination even for the partnership.

BREAKING DOWN 'Termination Event'

As part of the swap arrangement, the counterparties agree to notify each other if a termination event takes place. If a swap is terminated early, both parties will cease to make the agreed-upon payments, and the counterparty who is responsible for the termination event may be required to pay damages to the other counterparty. Default events such as failure to pay or declaration of bankruptcy can also cause a swap contract to end early.

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RELATED FAQS
  1. How can an investor terminate a derivative contract?

    Read a brief overview about some of the different ways that derivatives traders can terminate their contracts early, including ... Read Answer >>
  2. Which of the following statements least accurately describes the ways in which a ...

    The correct answer is: a) If the winning party simply terminates the swap, then he'll get zero for it. If a swap has value, ... Read Answer >>
  3. Who is the counterparty of a derivative?

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