This Practical Notes provides an overview of early termination arrangements under derivatives transactions. Subject to the considerations addressed in the body of the Practical Note, early termination mechanisms found in standard form derivatives contracts (specifically, the ISDA Master Agreement) should be enforceable under DIFC Law.

Unless the context requires otherwise, all defined terms in this Practice Note have the meaning set out in the ISDA Master Agreement.

• A derivative is a financial product whose value is determined by reference to the price of an underlying asset or index (such as an interest or forex rate). Corporations will typically use derivatives as a treasury risk management tool. The most common risks are:

  1. FX i.e., fluctuations in the currency/ies a corporation earns income in,

  2. interest rate i.e., over-exposure to floating or fixed interest rates, and

  3. commodities i.e., increases in oil price when a corporation's energy consumption is high.

• However, when a party to a derivative is ‘in the money', that is, their side of the contract has a positive market value, they are also exposed to the risk that the counterparty defaults on their payment obligations.