Template:M intro isda ISDA purpose

In which the into the point of an ISDA Master Agreement. What it does, why you need one, and why you can’t just crack on and trade swaps without one.

This might seem like pocket-calculator stuff to you, my seasoned veterans, but it never hurts to stop and ponder the ostensibly bleeding obvious. Going back to basics is bracing for the spirit.

The JC encountered his first Aïessdiyé a good thirty years ago now — shout out to GFF, still at it, down in the southern wilds — and is still discovering new things about it every week.

On becoming a shibboleth

Through bad habits and inattention, humans tend to work around the easances we once made to our “built environment”.

So it is with the ISDA Master Agreement. What started as the shortest route to market can, through acquiescent disregard, become a shibboleth: a hindrance on the road to transaction.

Once precisely an easance — an artefact for quickly tidying up and dispensing with formalities it would be laborious to repeat for every trade — the ISDA became a mountain of its own. Sure, you only need to climb it, from the bottom, once — but that has become a three-month operation. Nor do you scale an ISDA master agreement the way the way Alex Honnold scales El Capitan, brave and alone, an aeronaut of the spirit. You must take the entire modernist machinery of your institution with you. KYC. AML. Compliance. Credit. The docs team. And, of course, dear old Legal.

Once, the aggravation of a “long-form confirmation” was the mischief the ISDA should to solve. Some miss the good old days. Where bank Legal departments have not legislated outright against them — most have, long since — the temptation now is to ask, “Must we have an ISDA? Would not a long-form confirmation do?

There are other good reasons for a master agreement, as we will see, but none necessitates all the bureaucratic machinery that has grown around the ISDA. This is how the military-industrial complex of agency operates: it shapeshifts to create work to occupy the available rent.

The three aims of an ISDA

The ISDA Master Agreement is a framework under which two “counterparties” can transact over-the-counter derivatives — mainly, but not only, swaps. Besides its original appeal as an easance, the ISDA has three main aims: it is a relationship contract; a credit risk management tool, and — for those who need it — a capital optimisation tool.