Single agreement

Myths and legends of the market The JC’s guide to the foundational mythology of the markets.™ →Go uptown →intro →prem →sa The Single Agreement, forged at the dawn of the Age of Swaps. (von Sachsen-Rampton, 1854) Index: Click ᐅ to expand: Mythology Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Forged at the dawn of the Age of Swaps in the Iron Mountain, in the internal fires that raged across Bretton Woods, in the foothills of Entropy, an alliance of the First Men and the Children of the Woods forged the One Agreement: this would be the one agreement to rule them all, one agreement to margin them, one agreement to bind them in accordance with their terms, and in their darkness net them.

Section 1(c) in the ISDA Master Agreement

The ISDA is of course the OG when it comes to derivatives master agreements, and it was the first recorded instance of the single agreement concept. Mentioned airily in the Preamble to the 1987 ISDA, but then upgraded to fully fledged Section 1(c) in the 1992 ISDA and editions thereafter.

After a couple of inconsequential throat-cleary subsections, Section 1(c) starts getting a bit tastier in that it comprises the Single Agreement. This is deep ISDA lore, from which all the close-out netting that gives the ISDA Master Agreement its capital efficiency flows.

The “single agreement” concept

Here several pieces of magic come together to create the capital foundation of the modern master trading agreement. The challenge, originally solved by the First Men, was to create an architecture that allowed discrete, unitary, complete Transactions, such that creating a new one or terminating an old one didn’t upset the economic or legal integrity of other Transactions that were currently on foot — no untoward tax consequences, that is to say — while at the same time creating an umbrella framework so that, should something regrettable happen to either party, all Transactions can be quickly rounded up, evaluated, stopped and then collapsed down — “netted” — to a single payment, payable by one party to the other.

This involved some canny financial engineering. The general rules of set-off require not just a mutuality of parties to the off-setting debts, but also amounts falling due on the same day and in the same currency — neither of which was necessarily true of the independent Transactions executed under a multi-currency, cross-border ISDA Master Agreement.

Their solution was this concept of the “Single Agreement”: the over-arching agreement that, however independent and self-contained Transactions are for any other purpose, when it comes to their early termination, they transmogrify into the single host agreement, in the process reduced to mere calculation inputs to the final amount which one party must pay the other. Thereby the process is not one of “set-off” at all, but of calculating a single net amount, the payment of which would sort out all matters outstanding under the relationship.

The JC once had the idea of doing a “boring talk” about the history of the ISDA Master, and actually pitched it to the BBC for their podcast series. It was rejected, on account of being too boring. True story.

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See also

• Children of the Woods
• First Men
• Iron Mountain
• Further commentary on the “single agreement” clause of the ISDA Master Agreement — in the premium JC at Section 1(c)