1987 ISDA Interest Rate and Currency Exchange Agreement
Well-and-truly out-of-date version of the ISDA Master Agreement, replaced first by the 1992 ISDA and then the 2002 ISDA, the 1987 ISDA is nonetheless useful for forensic archaeologists interested to know how the state-of-the-art version got to be how it is today.[1]
And it is quite the yarn: you don’t get as shot-up and crazed as an ISDA Master Agreement without some scrapes and shootouts along the way.
Nineteen eighty-seven was a different world; the very first swap transaction[2] was only consummated six years previously. The swap master agreement was a nascent idea to streamline the documentation between counterparties, and to capture this nascent idea of close-out netting, but was predicated on the legal precepts of banking facilities. An ISDA Master Agreement is not, of course, any kind of banking facility: certainly not if it is daily-margined, as is now required by regulation for most of the 600 trillion of swaps transacted annually.
Many of the lending-derived credit concepts in the ISDA Master Agreement are practically redundant, but they hang on — artefacts of the great dogma of precedent.[3] If it is in the agreement, it must be there for a reason, and if I cannot conceive of one that must be down to my own mental frailty, rather than the caution or basic fussiness of our forefathers and foremothers.
So if you find something odd, check the fossil record to see if it has been there from the outset. If it has — for example, the 20-day limit on close out notices under Section 6(a) — then there’s a fair chance the market developments of the last 32 years might have rendered it pointless.
Differences between 1987 ISDA and 1992 ISDA
The 1992 ISDA was introduced principally, to:
- Expand range of products covered: Expand beyond interest rate and currency swaps.
- Netting: Enhance and strengthen close-out netting.
- Market developments: Reflect market developments — the period between 1987 and 1992 was a massive growth in the swaps market, and lessons were learned.
- Physical delivery: Allow for physical delivery of underlying instruments referenced in a swap (the only “underlying” for rates and fx is cash, so the 1987 ISDA only needed to contemplate the payment of cash).
- Settlement Amounts: Introduce greater flexibility for determining {{{{{1}}}|Settlement Amount}}s on termination of {{{{{1}}}|Transactions}} (introducing the {{{{{1}}}|Loss}}, {{{{{1}}}|Market Quotation}}, {{{{{1}}}|First Method}} and {{{{{1}}}|Second Method}} regimes thereafter replaced in the 2002 ISDA by {{{{{1}}}|Close-out Amount}}).
- Two-way payments on termination: Under the 1987 ISDA a {{{{{1}}}|Defaulting Party}} is not entitled to termination payments. This is the so-called “limited two-way payments” provision which was a large part of the reason 1987 ISDAs were not reliable on netting.
- Settlement netting: more flexibility for netting groups of transactions under Section {{{{{1}}}|2}} - under the 1987 ISDA you could either net just within a single {{{{{1}}}|Transaction}} or across all Transactions but not, as standard, across a given subset of {{{{{1}}}|Transactions}}.
There are some others.