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.

RELATED TERMS
  1. Termination Clause

    A section of a swap contract that describes what will happen ...
  2. Replacement Swap

    A substitute for a swap arrangement that is terminated before ...
  3. Agreement Value Method

    The most common of three official methods established by the ...
  4. Indemnification Method

    A technique for calculating termination payments when a swap ...
  5. Formula Method

    A technique for calculating termination payments on a prematurely ...
  6. Termination Date

    The day on which a swap contract becomes invalid and no further ...
Related Articles
  1. Trading

    An In-Depth Look At The Swap Market

    The swap market plays an important role in the global financial marketplace; find out what you need to know about it.
  2. Markets

    Who is a Counterparty?

    The counterparty is the other party in a financial transaction.
  3. Investing

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
  4. Investing

    What is Terminal Value?

    The terminal value of an asset is its anticipated value on a certain date in the future.
  5. Trading

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  6. Investing

    Why Do Some Failed Mergers Result in Break-Up Fees?

    When mergers go bad, there's often a break-up fee involved of as high as 3-5% of the value of the proposed merger.
  7. Managing Wealth

    Explaining Counterparty Risk

    Counterparty risk is the risk that the other party in an agreement will default, or fail to live up to its contractual obligation.
  8. Markets

    What's an Interest Rate Swap?

    An interest rate swap is an exchange of future interest receipts. Essentially, one stream of future interest payments is exchanged for another, based on a specified principal amount.
  9. Trading

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  10. Investing

    Different Types of Swaps

    Investopedia explores the most common types of swap contracts.
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?

    Learn about the counterparty to a derivative contract, and how derivative swap agreements traded over the counter have counterparty ... Read Answer >>
  4. How are swap agreements financed?

    Learn how swap agreements are now cleared by swap execution facilities and require the use of collateral margin to hold, ... Read Answer >>
  5. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
  6. How do currency swaps work?

    Learn about how a currency swap works, including who uses these transactions, and the mechanics and purpose of the different ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center