# ISDA Section 2(a)(iii) Condition Precedent & 2014 Amendment

> Analyze ISDA Master Agreement Section 2(a)(iii): Lomas v Firth Rixson (UK) vs Metavante (U.S. Bankruptcy Court) and the 2014 90/180-day sunset amendment.

Canonical: https://finlexicon.org/wiki/isda-section-2a-iii-condition-precedent-payment-suspension
Last updated: 2026-11-14T19:33:17.109Z

**Publication:** FinLexicon Wiki
**Category:** Isda Csa Derivatives Collateral
**Published:** 2026-11-14T01:15:25.915Z
**Author:** Arthur Pendleton, CPA, JD (CPA, JD in International Banking & Basel Regulation)
**Reviewer:** Not recorded

## Answer-first summary

Section 2(a)(iii) of the ISDA Master Agreement allows a non-defaulting party to suspend swap payments while an Event of Default persists—sparking transatlantic court clashes between Lomas v Firth Rixson and Metavante.

## Key takeaways

- Section 2(a)(iii) suspends—rather than permanently extinguishes—a non-defaulting party’s swap payments while an Event of Default or Potential Event of Default continues.
- U.S. Bankruptcy Court (Metavante, 2009) barred indefinite Section 2(a)(iii) holdouts under 11 U.S.C. § 365(e), whereas England’s Court of Appeal (Lomas v Firth Rixson, 2012) upheld them.
- Basel CRE52.20(3) denies all regulatory netting capital relief to any master agreement containing a "walkaway clause" (including 1992 First Method or functional walkaways).
- ISDA’s 2014 Section 2(a)(iii) Amendment resolves the transatlantic split via a 90-to-180-day Condition End Date notice forcing the solvent party to either close out or resume paying.

## Related financial entities

- **ISDA 2002 Master Agreement & Credit Support Annex (CSA) Close-Out Netting** (ISDA-2002-CSA) — license: ISDA 2002 Master Agreement & Credit Support Annex (CSA) Close-Out Netting (ISDA-2002-CSA) refers to an institutional financial benchmark and regulatory standard monitored by International Swaps and Derivatives Association (INTL), currently calibrated at 0.0% (Netted Exposure Haircut) as of October 2026.
- **ISDA 2002 Master Agreement & Credit Support Annex (CSA) Close-Out Netting — 2026 Standard** (ISDA-2002-CSA-STD) — license: ISDA-2002-CSA 2026 Institutional Benchmark Framework is defined as the standardized quantitative and compliance methodology published by International Swaps and Derivatives Association governing ISDA 2002 Master Agreement & Credit Support Annex (CSA) Close-Out Netting across INTL capital markets (0.0% Netted Exposure Haircut, October 2026).

## Analysis

Buried inside sixty words of **Section 2(a)(iii) of the 1992 and 2002 ISDA Master Agreements** sits one of the most fiercely litigated clauses in financial history. Designed to prevent a solvent counterparty from wiring cash into a black-hole bankruptcy estate ("throwing good money after bad"), Section 2(a)(iii) makes every scheduled swap payment and delivery subject to the **condition precedent** that **no Event of Default or Potential Event of Default** with respect to the other party has occurred and is continuing.

## How Unamended Section 2(a)(iii) Created "Perpetual Limbo" After Lehman’s 2008 Bankruptcy

When Lehman Brothers Holdings Inc. and Lehman Brothers International (Europe) filed for insolvency in September 2008, hundreds of out-of-the-money counterparties—corporates, municipalities, and funds that **owed** net millions to Lehman on interest-rate swaps—made a startling tactical discovery inside the [2002 ISDA Master Agreement architecture](/wiki/isda-2002-master-agreement-vm-im-csa-simm-netting-guide):

1. Under **Section 6(a)**, electing Early Termination upon an [Event of Default](/wiki/isda-section-5-events-of-default-cross-default-threshold-amount) is a **right, not an obligation**, of the Non-Defaulting Party (unless Automatic Early Termination [AET] was switched on in the Schedule!).
2. Had those out-of-the-money counterparties designated an Early Termination Date, **Section 6(e)** two-way close-out netting ("Full Two-Way Payment") would have forced them to **pay Lehman’s estate** the full positive [Close-Out Amount](/wiki/isda-1992-market-quotation-loss-vs-2002-close-out-amount) immediately!
3. Instead, they **refused to terminate** and invoked **Section 2(a)(iii)**—withholding every quarterly fixed-rate swap payment indefinitely while Lehman remained in permanent bankruptcy!

![Decision tree comparing ISDA Section 2(a)(iii) payment suspension under U.S. Metavante, English Lomas, and 2014 Sunset Amendment](/api/figure?type=flow&title=ISDA%20Section%202%28a%29%28iii%29%20Default%20%26%20Condition%20End%20Date%20Decision%20Tree&subtitle=Resolving%20out-of-the-money%20non-defaulting%20party%20holdouts%20across%20New%20York%20and%20English%20Law&steps=1.%20Sec%205%20Default%3A%3ACounterparty%20enters%20insolvency%2Fdefault%20while%20Non-Defaulting%20Party%20is%20out-of-the-money%7C2.%20Sec%202%28a%29%28iii%29%20Hold%3A%3ANon-Defaulting%20Party%20withholds%20scheduled%20swap%20cash%20flows%20without%20calling%20Sec%206%28a%29%7C3.%20Governing%20Law%3A%3ANY%20Law%20%28Metavante%29%3A%20terminate%20promptly%20or%20pay!%20English%20Law%20%28Lomas%29%3A%20indefinite%20hold%7C4.%202014%20Sunset%20Notice%3A%3AAdministrator%20serves%20notice%20-%3E%2090%2F180-day%20Condition%20End%20Date%20forces%20close-out%20or%20pay!&metrics=U.S.%20Metavante%20Window%3A%3APrompt%20%2F%20Days%3A%3A11%20U.S.C.%20%C2%A7%20365%28e%29%20Safe%20Harbor%7CEnglish%20Unamended%3A%3AIndefinite%3A%3ALomas%20v%20Firth%20Rixson%20%5B2012%5D%7C2014%20ISDA%20Sunset%3A%3A90%E2%80%93180%20Days%3A%3ACondition%20End%20Date%20Cap%7CSec%206%28e%29%20Rule%3A%3ATwo-Way%20Pay%3A%3AWalkaway%20Clauses%20Abolished)

## Transatlantic Judicial Split: U.S. Metavante Ruling vs English Court of Appeal Lomas v Firth Rixson

Lehman’s U.S. Chapter 11 debtors and UK PwC administrators sued in New York and London, producing diametrically opposite precedents across the two governing laws of global OTC swaps:

- **United States (*In re Lehman Brothers Holdings Inc. / Metavante*, Bankr. S.D.N.Y. 2009)**: Judge James Peck ruled that under the U.S. Bankruptcy Code (**11 U.S.C. §§ 365(e)(1) & 560**), although swap safe harbors protect prompt *liquidation/termination* of swaps, **sitting on an un-terminated swap indefinitely while refusing to pay violates the automatic stay and ipso facto prohibition**! Metavante was given a brief "reasonable window" to terminate and pay—or else perform its ongoing swap payments with statutory default interest!
- **England & Wales (*Lomas v JFB Firth Rixson Inc.*, [2012] EWCA Civ 419)**: The English Court of Appeal enforced the literal freedom-of-contract wording of Section 2(a)(iii)! It held that (a) payment obligations are **suspended** (not extinguished once-and-for-all), (b) no implied term forces a Non-Defaulting Party to designate Early Termination within a "reasonable time," and (c) suspended obligations simply fall away if still unpayable at final trade maturity!

## Regulatory Backlash & the June 2014 ISDA Section 2(a)(iii) Time-Limit Amendment

Prudential supervisors—including the [UK Prudential Regulation Authority](/regulators/prudential-regulation-authority-uk-173), UK HM Treasury, and [BCBS / BIS](/regulators/bcbs-bis)—warned that indefinite Section 2(a)(iii) payment suspension trapped billions of liquid value away from failing G-SIB estates like [Bank of America](/institutions/bofa) or [BNP Paribas](/institutions/bnp-paribas) and undermined orderly resolution, threatening to **deny regulatory close-out netting capital relief** on unamended contracts.

In **June 2014**, ISDA published the **Amendment to the ISDA Master Agreement in respect of Section 2(a)(iii)** introducing a contractual **"Condition End Date"**: the defaulting party (or its insolvency administrator) may serve formal notice triggering a negotiated **sunset window (typically 90 or 180 calendar days)**—by the end of which the Non-Defaulting Party MUST either designate an Early Termination Date or resume paying suspended amounts (with accrued interest)!

| Legal Regime / Contract Version | Can Out-of-Money Party Suspend Indefinitely? | Are Suspended Amounts Extinguished or Deferred? | Trigger to End Limbo | Basel Netting Capital Status |
| --- | --- | --- | --- | --- |
| 1992 ISDA ("First Method" Walkaway) | Walkaway extinguished full net liability! | Permanently zeroed on close-out | Abolished globally in 2002 ISDA | BANNED under Basel CRE52.20(3)! |
| Unamended 1992/2002 ISDA (NY Law) | NO (*Metavante*, Bankr. S.D.N.Y. 2009) | Accrues default interest if un-terminated | Automatic stay enforces prompt election | Enforceable via U.S. safe harbors |
| Unamended 1992/2002 ISDA (English Law) | YES (*Lomas v Firth Rixson* [2012]) | Suspended until default cured or maturity | Only cure of default or final trade expiry | Regulatory capital/resolution risk! |
| 2014 ISDA Sec. 2(a)(iii) Amendment | NO — Capped at Condition End Date | Payable with interest if not closed out | Defaulting party serves Sunset Notice (90/180d) | Full Basel & PRA netting compliance |

## Interaction With Credit Support Annexes and Resolution Stay Protocols

Notice too that under Paragraph 4(a) of the 1995 English Law CSA and Paragraph 4(a) of the 1994 NY Law CSA, delivery of collateral is *also* subject to conditions precedent! Modern [2016 Variation Margin CSAs](/wiki/isda-2016-vm-csa-ny-security-interest-vs-english-title-transfer) and [BRRD / U.S. QFC Resolution Stay Protocols](/wiki/close-out-netting-legal-opinions-stay-protocols-brrd-us-qfc) tightly bound suspension windows to `24–48 hours` during resolution bail-ins.

![Cash recovery to defaulting estate on a -$50M out-of-the-money 5-year swap across four ISDA Section 2(a)(iii) regimes](/api/figure?type=bars&title=Estate%20Recovery%20on%20a%20%2450M%20In-the-Money%20Swap%20to%20Defaulting%20Bank%20%28%24M%29&subtitle=Comparing%201992%20Walkaway%2C%20Unamended%20English%20Law%20Holdout%2C%202014%2090-Day%20Sunset%2C%20and%20NY%20Metavante&steps=1992%20First%20Method%3A%3AOutlawed%20Walkaway%20clause%20let%20non-defaulting%20party%20pay%20%240.0M%20%28%2450M%20windfall!%29%7CUnamended%20English%3A%3ACounterparty%20suspends%20all%2020%20quarterly%20coupons%20via%20Sec%202%28a%29%28iii%29%20-%3E%20%240.0M%20paid!%7C2014%2090-Day%20Sunset%3A%3AAdministrator%20serves%20notice%3B%20counterparty%20closes%20out%20by%20Day%2090%20-%3E%20~%2450.0M%20paid%7CNY%20Law%20%28Metavante%29%3A%3ABankruptcy%20court%20compels%20prompt%20termination%20or%20performance%20-%3E%20%2450.0M%20%2B%20interest!&metrics=Walkaway%20Recovery%3A%3A%240.0M%20%280%25%29%3A%3ADisqualified%20by%20Basel%7CUnamended%20Lomas%3A%3A%240.0M%E2%80%93%245M%3A%3ASuspended%20Past%20Maturity%7C2014%20Sunset%20Recovery%3A%3A%2450.0M%20%28100%25%29%3A%3A90-Day%20Close-Out%20Cap%7CNY%20Metavante%3A%3A%2450.0M%2B%20Int.%3A%3AMandatory%20Prompt%20Election)

## Drafting Best Practices in Institutional Schedule Negotiations

Legal and credit teams benchmark Condition End Date elections (`90 days` dealer-to-dealer vs `180 days` institutional buy-side) across the [ISDA-2002-CSA Standard](/entity-index/isda-2002-csa-isda-2002-master-agreement-credit-support-annex-csa-close-out-netting) and the [2002 ISDA Master Agreement, CSA & SIMM topic hub](/topics/isda-csa-derivatives-collateral).

```formula
Payment_Due(t) = Contractual_Coupon(t) * I( No_EoD_or_PEoD_at_t OR t > Condition_End_Date )
Condition_End_Date = Date_of_Defaulting_Party_Notice + Sunset_Days [ Standard Election: Sunset_Days in {90, 180} ]

Worked Estate Valuation Audit (5Y Pay-Fixed 4.50% Swap on $200M Notional; SOFR falls to 2.00%; Defaulting Bank MTM = +$22.4M):
 Quarterly Net Coupon Owed by Solvent Client to Defaulting Bank = $200M * (4.50% - 2.00%) * 0.25 = $1.25M / quarter
 Without 2014 Amendment (English Law): Client invokes Sec 2(a)(iii) for 20 quarters -> Estate loses $22.4M PV ($25.0M undiscounted)!
 With 90-Day Condition End Date: Administrator serves notice on Day 15 -> By Day 105 Client MUST close out under Sec 6(e) & pay $22.4M!
```

## Frequently asked questions

### What is the difference between a prohibited "Walkaway Clause" ("First Method") and Section 2(a)(iii)?

Under the obsolete 1992 ISDA First Method (Walkaway), even *after* terminating the agreement under Section 6, a solvent party owing net money paid $0; under Second Method / 2002 Full Two-Way Payment, once terminated you *must* pay 100% of net owes, which is why holdouts avoided terminating and hid behind Section 2(a)(iii) instead!

### Does Section 2(a)(iii) also apply to a Potential Event of Default before a grace period expires?

Yes! That is its essential daily protective purpose: if Counterparty B misses a payment on Monday (starting a 1-Local-Business-Day grace period before becoming an Event of Default), Section 2(a)(iii) lets Counterparty A lawfully pause wiring cash on Monday afternoon during the grace window.

### If a non-defaulting party suspends payments under English law and later closes out, do suspended back-coupons enter Section 6(e)?

Yes! *Lomas v Firth Rixson* confirmed that Section 2(a)(iii) merely suspends the payment obligation rather than wiping out the underlying debt; if an Early Termination Date is designated prior to trade maturity, all unpaid past-due coupons enter "Unpaid Amounts" in Section 6(e) with interest!

### Why do dealers avoid switching on Automatic Early Termination (AET) in the U.S. and UK if it prevents Section 2(a)(iii) holdouts?

Because AET terminates the entire swap book blindly at the exact microsecond an insolvency petition is filed (often before the solvent bank even knows, leaving the desk unhedged in volatile markets!). AET is switched on only for jurisdictions like Switzerland or Germany where local insolvency law requires automatic termination for netting.


## Source URLs

- https://www.isda.org/2014/06/19/isda-publishes-section-2aiii-amendment-2/
- https://www.bis.org/basel_framework/chapter/CRE/52.htm
- https://www.bankofengland.co.uk/prudential-regulation/publication/2014/netting-of-counterparty-credit-risk-associated-with-master-agreements

## Citation

- APA: Arthur Pendleton, CPA, JD. (2026). ISDA Section 2(a)(iii) Condition Precedent: Payment Suspension, Lomas & 2014 Sunset Amendment. FinLexicon Wiki. https://finlexicon.org/wiki/isda-section-2a-iii-condition-precedent-payment-suspension
- Canonical article: [ISDA Section 2(a)(iii) Condition Precedent: Payment Suspension, Lomas & 2014 Sunset Amendment](https://finlexicon.org/wiki/isda-section-2a-iii-condition-precedent-payment-suspension)
- Site research index: [FinLexicon Wiki](https://finlexicon.org/llms-full.txt)