Under the 1998 ISDA FX and Currency Option Definitions, FX fallback provisions run in a fixed order once a disruption event is confirmed: postpone the valuation, try an alternative rate source, poll reference dealers, and let the calculation agent determine the rate in good faith. If none of that produces a workable settlement, the trade terminates on a no-fault basis. Force majeure sits behind the chain, not alongside it.
The framework is contractual, so the specific events and the specific fallbacks come from each trade’s confirmation. But the logic is consistent across the market, and understanding the sequence matters more than memorizing any single confirmation.
What Triggers a Fallback
Section 5.1 of the 1998 Definitions lists the events that can prevent an FX trade from settling as originally planned. A confirmation identifies which of them apply to the transaction, and the event must meet the contractual definition before any fallback kicks in.1International Swaps and Derivatives Association. 1998 FX and Currency Option Definitions
A Price Source Disruption occurs when the agreed fixing simply is not published at the designated time. A General Inconvertibility event is triggered when a government or central bank measure makes it impossible to convert the local currency through customary legal channels. General Non-Transferability is a separate event: the currency can still be exchanged, but it cannot be moved between the accounts the trade requires. A Dual Exchange Rate event arises when the rate specified in the settlement rate option splits into two or more rates, typically because a government has introduced a split regime. A Price Materiality event applies when a confirmation designates both a primary and secondary source and the two diverge by at least the Price Materiality Percentage set in the confirmation.1International Swaps and Derivatives Association. 1998 FX and Currency Option Definitions
Two sovereign-credit events also feature. A Benchmark Obligation Default is triggered when a reference debt instrument suffers a payment failure, moratorium, repudiation, or nonconsensual restructuring. A Governmental Authority Default applies the same concept to any security or debt of a government entity. Either can freeze the FX market for the affected currency even if the exchange rate itself is still being published.1International Swaps and Derivatives Association. 1998 FX and Currency Option Definitions
Illiquidity began as a currency-specific event for offshore deliverable Chinese yuan trades. ISDA’s 2020 Definitions Working Group proposed extending it to all deliverable currencies. When designated, the fallback chain typically begins with settlement postponement for up to 14 calendar days.2Federal Reserve Bank of New York. Deliverable Currency Disruption Summary Table
The Fallback Order
Once a disruption is confirmed, the contract does not jump to a subjective valuation. It works through a predetermined chain, each step more interventionist than the last. The confirmation controls the order and which fallbacks apply, but the standard sequence follows the same logic: wait, find another price, ask dealers, decide.
Valuation Postponement
The first fallback is patience. Valuation Postponement defers the rate determination to the first business day after the disruption ceases, subject to a cap of 14 consecutive calendar days measured from the original valuation date.3Federal Reserve Bank of New York. EMTA, ISDA and the FXC Announce New and Amended Provisions The cap runs cumulatively, so unscheduled holidays and price source disruptions during the same period share the same 14-day window. If the disruption is still going on when day 14 passes, the contract moves to the next fallback.4International Swaps and Derivatives Association. EMTA Template Terms
Fallback Reference Price
If the primary rate source does not recover in time, the contract points the parties to an alternative settlement rate option. Annex A to the 1998 Definitions catalogs rate sources for both emerging and non-emerging currency pairs. Common alternatives for major currencies include WM/Reuters mid-rates and Bloomberg fixings; for emerging market pairs, Annex A specifies sources tied to local central bank publications or composite dealer surveys.5EMTA. Annex A to the 1998 FX and Currency Option Definitions
For non-emerging currency pairs, Annex A supplies a general fallback: if the specified spot rate is not published on a rate calculation date, the calculation agent determines the rate in good faith and in a commercially reasonable manner at a time reasonably close to the originally specified time, unless the confirmation provides otherwise.6International Swaps and Derivatives Association. Annex A to the 1998 FX and Currency Option Definitions
Dealer Poll
Between a failed price source and full calculation agent discretion, the confirmation may designate a Reference Bank poll. The calculation agent solicits quotes from leading FX dealers and builds a composite rate. The standard procedure calls for five dealers, selected in good faith:
- Five quotes received: drop the highest and lowest, average the middle three.
- Three or four quotes: take the arithmetic mean of what came in.
- Fewer than three quotes: the calculation agent determines the rate in good faith using commercially reasonable methods.
Quotes must reflect the relevant quotation rate at the specified time. If the confirmation does not specify a quotation rate, the mid-rate applies by default.7International Swaps and Derivatives Association. ISDA 2021 Fallbacks Protocol June 2022 Benchmark Module During a genuine currency crisis, getting five responsive dealers is often the hard part. When the poll draws fewer than three, it collapses back into calculation agent discretion.
Calculation Agent Determination
When no external source produces a rate, the calculation agent, usually the dealer or larger institution named in the confirmation, becomes the final arbiter. The standard is good faith using commercially reasonable methods, and the resulting rate binds the trade. The calculation agent role is heavily litigated, largely because the agent is typically also a party with a financial interest in the outcome.
When Every Fallback Fails
If the chain runs out, the contract does not hang in limbo. The standard resolution is no-fault termination, treated as an Additional Termination Event under Section 6 of the ISDA Master Agreement. Both parties are Affected Parties, and either can designate an Early Termination Date by notice.8Financial Markets Law Committee. Issue 56 Appendix 4B – Materials Relating to Contracts
The termination payment is calculated using the Loss measure, regardless of what the parties elected in their Master Agreement schedule. The termination currency defaults to the non-event currency, so the payment is not stuck in the currency that cannot be converted or transferred in the first place.
Where Force Majeure Fits
Currency disruptions and force majeure can overlap, particularly during sanctions or geopolitical crises. The ISDA framework resolves the overlap with a priority rule: disruption fallbacks must be exhausted first. Section 5(b)(ii) of the 2002 ISDA Master Agreement defines a Force Majeure Event as arising only “after giving effect to any applicable provision, disruption fallback or remedy specified in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement.”9U.S. Securities and Exchange Commission. ISDA 2002 Master Agreement
A party cannot skip the fallback chain by declaring force majeure. If the confirmation calls for valuation postponement, a fallback reference price, and calculation agent determination, all three must fail or be inapplicable before force majeure becomes available. Force majeure sits behind the framework as a backstop, not as an alternative route.
Notice and Documentation
Triggering a fallback requires formal notice supported by objective evidence. The notifying party identifies the trade by its unique transaction identifier, documents the date and time the disruption was first observed, and cites the specific section of the 1998 Definitions or Annex A that applies. Verifiable evidence typically includes screen captures showing the missing rate, official central bank announcements imposing currency restrictions, or published regulatory orders.
Delivery method matters. Under Section 12(a) of the 2002 ISDA Master Agreement, notices related to termination events under Sections 5 and 6 may not be sent by electronic messaging system or email. Acceptable methods for those notices are limited to physical delivery by courier, facsimile, or certified or registered mail. Personal or courier delivery is effective on the date of delivery; a fax is effective when received in legible form; certified mail is effective on the date delivered or delivery is attempted. A delivery after the close of business on a Local Business Day is deemed effective on the next Local Business Day.9U.S. Securities and Exchange Commission. ISDA 2002 Master Agreement
Acknowledgement from the receiving party is not required. Under the ISDA 2025 Notices Hub Protocol, a covered notice is deemed effective on the date delivered “without any requirement for acknowledgement by the Receiving Party or evidence of actual receipt.”10International Swaps and Derivatives Association. ISDA 2025 Notices Hub Protocol
Tax Consequences of a Fallback Rate
When a fallback rate replaces the original settlement rate, any difference can produce a taxable gain or loss. Under 26 U.S.C. § 988, gain or loss from a foreign currency transaction is computed separately and treated as ordinary income or loss, not capital. The rule reaches forward contracts, futures, options, and similar instruments denominated in or determined by reference to a nonfunctional currency.11Office of the Law Revision Counsel. 26 U.S. Code 988 – Treatment of Certain Foreign Currency Transactions
Gain or loss is measured by exchange rate changes between booking and payment. If a disruption postpones settlement by 14 days and the fallback rate differs materially from what the original rate would have been, the result is realized in the year the payment is actually made.12Internal Revenue Service. Overview of IRC Section 988 Nonfunctional Currency Transactions A taxpayer can elect capital treatment under § 988(a)(1)(B), but the election must be made before the close of the day the transaction is entered into, and the instrument must be a capital asset that is not part of a straddle.11Office of the Law Revision Counsel. 26 U.S. Code 988 – Treatment of Certain Foreign Currency Transactions By the time a disruption event lands, that window has long closed.
The 2026 FX Definitions
In March 2026, ISDA and EMTA published the 2026 FX Definitions. They take effect on November 22, 2027, and will replace the 1998 framework as the market standard. The updated definitions revise the disruption event and fallback provisions for deliverable transactions, incorporate EMTA template terms and market practices for non-deliverable FX transactions, and align calculation agent standards with those in the 2021 ISDA Interest Rate Derivatives Definitions.13International Swaps and Derivatives Association. ISDA and EMTA Publish Revised Definitions for FX Derivatives Market For deliverable transactions, no-fault termination becomes the secondary fallback under the new definitions, formalizing what had been handled through supplemental protocols and confirmation-level drafting. Trades entered into before the implementation date will generally continue to reference the 1998 Definitions unless the parties amend their confirmations.