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Template:M intro isda ISDA purpose: Difference between revisions
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Firstly, the Master Agreement is a [[relationship contract]]: an agreement sealing a pact of amity and good dealing between two strangers in the jungle. It is, of sorts, a peace treaty: it establishes basic terms between the parties upon which they may deal, reciting their aspirations, outlining their cultural idiosyncrasies and behavioural red lines, and dealing with housekeeping matters like contact details, account numbers and authorised agents, and generally gathering up all the manifold dreary details needed to ease the experience of transacting with each other. | Firstly, the Master Agreement is a [[relationship contract]]: an agreement sealing a pact of amity and good dealing between two strangers in the jungle. It is, of sorts, a peace treaty: it establishes basic terms between the parties upon which they may deal, reciting their aspirations, outlining their cultural idiosyncrasies and behavioural red lines, and dealing with housekeeping matters like contact details, account numbers and authorised agents, and generally gathering up all the manifold dreary details needed to ease the experience of transacting with each other. | ||
The Master Agreement does not itself create any obligations or liabilities. It does not commit anyone to any Transaction. Therefore, curiously, | The Master Agreement does not itself create any obligations or liabilities. It does not commit anyone to any Transaction. Therefore, curiously, it does not provide ''at all'' for termination without fault on notice. While no Transactions are on foot, the ISDA doesn’t ''do'' anything: it just provides an ''architecture'': walls within which parties may safely play; a roof beneath which they may comfortably dance ''if they both feel like it''. If they don’t, no one says they have to. You can’t actually, terminate an ISDA. Even total close-out doesn’t terminate the master agreement. If your relationship ceases — should your pact break down — the ISDA just lies there, fallow, like a seed in the desert awaiting rain.<ref>This is, indeed, the premise of [[Muriel Repartee]]’s Z-Grade [[Fi-Fi]] schlock horror [[ISDA: Dawn of the Dead]].</ref> | ||
In that an ISDA is painful to put in place — if it only takes a couple of months you have done well — it is also a [[commitment signal]]. It shows you care enough to engage in the painstaking process of working up “[[strong docs]]”. | In that an ISDA is painful to put in place — if it only takes a couple of months you have done well — it is also a [[commitment signal]]. It shows you care enough to engage in the painstaking process of working up “[[strong docs]]”. | ||
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The ISDA gives each party the rights it needs to manage and reduce its [[credit exposure]] to ''the other party'' as a result of all this derivatives trading. These include {{isdaprov|Credit Support}} and [[Close-out Amount - ISDA Provision|Close-out]] rights. | The ISDA gives each party the rights it needs to manage and reduce its [[credit exposure]] to ''the other party'' as a result of all this derivatives trading. These include {{isdaprov|Credit Support}} and [[Close-out Amount - ISDA Provision|Close-out]] rights. | ||
{{isdaprov|Credit Support}} may | {{isdaprov|Credit Support}} may comprise margin “posted” by the counterparty against its own exposure, or [[guarantee]]s, [[keep-well]]s and [[letters of credit]] provided by third parties on its behalf. This leads to an amount of fuss pottery in the agreement: should credit triggers that catch the counterparty’s own deteriorating prospects key off credit support deteriorations too? In a basic sense, yes, obviously — but should the failure of an unaffiliated arm’s length credit insurer be grounds for immediate closeout, or just on notice, should the insurer not quickly be replaced?<ref>I mean, ''could'' a monoline credit insurer present a systemic risk to the financial system? Don’t answer that.</ref> | ||
{{isdaprov|Events of Default}} and {{isdaprov|Termination Events}} entitle you to [[close out]] {{isdaprov|Transactions}} early, should your counterparty ''not'' perform (or should its creditworthiness deteriorate in oblique ways your credit department believes increase its risk of not performing). | {{isdaprov|Events of Default}} and {{isdaprov|Termination Events}} entitle you to [[close out]] {{isdaprov|Transactions}} early, should your counterparty ''not'' perform (or should its creditworthiness deteriorate in oblique ways your credit department believes increase its risk of not performing). | ||