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Latest revision as of 11:50, 15 September 2024
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2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™ Go premium
Crosscheck:
Preamble in a Nutshell™
Original text
See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.
Resources and Navigation
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Comparisons
Redlines
- 1987 ⇒ 1992: Redline of the ’92 vs. the ’87: comparison (and in reverse)
- 1992 ⇒ 2002: Redline of the ’02 vs. the ’92: comparison (and in reverse)
- 1987 ⇒ 2002: Redline of the ’92 vs. the ’87: comparison (and in reverse)
Discussion
The Preamble to the 1987 ISDA had an extra feature: the single agreement provision. By 1992, this had been moved to its own little subclause in Section 1(c), and there it has stayed ever since.
As for the modern ISDAs, there is little material difference between the 1992 ISDA and the 2002 ISDA here. By 2002, ISDA’s crack drafting squad™ was a more world-weary, battle-hardened unit than it was in 1992, and was more alive to the idea that one might document Transactions other than via a full-blown Confirmation. Particularly in the equity derivatives world, because the asset class tends to be fairly vanilla, the market was starting to generate Master Confirmation Agreements for certain markets and regions, meaning that commoditised swap transactions could be fully automated and electronically completed through online trade matching systems without any faxed bits of paper saying “Dear Ladies and Gentlemen” and similarly genteel things that are so archaic as to seem, in these snow-flecked days, mildly offensive.
Basics
Chekhov’s gun
Russian: Чеховское ружьё (n.)
A narrative principle that states that every element in a story must be necessary, and irrelevant elements should be removed.
“If there is a rifle hanging on the wall in the first act, it must go off in the third.”
A preamble is he legal eagle’s opportunity to set a scene, a juridical version of “once upon a time”: an integrated passage that may or may not start with “whereas”, “background” or something like that and is meant to prime you for the meat of contract.
The ISDA Master Agreement needs just such a scene-setter: everyone, once, stares at that gnomic title and thinks, “okay, what on earth is this all about?” That is the Preamble. There is not much to see but, casually, it calls the reader’s attention to things that will later become important — the proverbial rifle hanging above the fireplace that goes off in the third act. That is where the similarities with Chekhov end, though: before long, it will go full Dostoyevsky on us.
The ISDA Master Agreement is the basic framework that applies to anyone who touches down on planet ISDA. The preamble tells us about its tri-partite form: the Pre-printed Master, a Schedule of elections and amendments, and Confirmations setting out the terms of Transactions.
ISDAs, Ancient and Modern
There are two versions of the ISDA still widely in use — the 2002 ISDA Master Agreement and the ISDA Master Agreement (Multicurrency — Cross Border) which is known to all who love her as the 1992 ISDA Master Agreement. These we call the “Modern ISDAs”.
There are two more or less fully retired versions: the ISDA Interest Rate and Currency Exchange Agreement of 1987 (the 1987 ISDA) and the ISDA Code of Standard Wording, Assumptions and Provisions for Swaps of 1985 (let’s call this the 1985 Code, though few people have ever even seen one). These we call the “Ancient ISDAs”.
There is one, the 2008 ISDA Decentralised Automomous Organisation-as-an-Agreement that died tragically during conception and never made it to the market but yet exists as an apocryphal testament to the enduring, wishful optimism of derivatives lawyers the world over.[1] We call this the “Atlantis Variation”.
2002 ISDA
The still, after all these years, state-of-the-art 2002 ISDA. This is the most popular version — it took industry participants an awfully long time to get comfortable with it, despite its innovations being largely sensible but, twenty-two years into its life, most of the European and Asian markets trade on the 2002 ISDA, and we sense even those camelesque Americans are coming to begrudging terms with it. If you are ever not sure, on this wiki, the JC will generally have the 2002 ISDA in mind, though there is a fully scoped user manual and comparative discussions relating to the 1992 ISDA as well. Speaking of which —
1992 ISDA
The 1992 ISDA was the first global, pan-transactional, earth-shaking version of the ISDA Master Agreement. It was the first one to be actually called a “Master Agreement”. It is still popular with traditionalists, those who can’t abide a one-day grace period for Failure to Pay or Deliver, and Americans.
Until quite recently much of the American market was still on the 1992 ISDA, although most users heavily modified it to take in most of the innovations of the 2002 ISDA. But the anecdotal sense we have is that even in New York, these days, the 2002 ISDA is the master agreement of choice for the discerning ninja.
The fact that there was so much institutional reluctance to update to a new and better agreement should tell us a good deal, both good and bad, about how people in established businesses behave — in brief, they like what they know — and how quickly things really change: not very.
Perhaps had the 2002 ISDA been more radical it might have stood a greater chance quick of adoption. On the other hand, the further the fruit falls from the tree, the greater the chance of outright failure. Just ask “Flight 19”, the poor, doomed Linklaters team who drafted the 2011 Equity Derivatives Definitions.
1987 ISDA
The 1987 ISDA Interest Rate and Currency Exchange Agreement — it wasn’t, by name, a comprehensive “master agreement” — is all but a dead letter now. But, we sense, not quite.
Just as there are still soldiers in the Burmese jungle fighting the Second World War, through inattention or truculence there may be pockets, embedded deep in the impassable hinterlands of structured finance who still cling to the 1987 ISDA, notwithstanding its well-recognised shortcomings. If you come across one of these, proceed with caution: 1987 ISDAs don’t have a lot of safety features a modern derivatives counterparty relies on, so are only for real die-hard vinyl junkies and weirdos.
1985 ISDA Code
These days interesting only for its place in the fossil record — and a witty acrostic that points to a playfulness among the First Men that has long since vanished, the 1985 ISDA Code was out of use well before the millennium. The JC only found out about it when visiting a retired ninja in a care home in 2015, and at first assumed it was some sort of urban myth or in-joke. But apparently not.
2008 ISDA — “Atlantis”
The 2008 ISDA Decentralised Autonomous Organisation-as-an-Agreement — a “this-fixes-everything, on-chain, smart, artificially intelligent” was introduced during, and tragically destroyed by, the Global Financial Crisis.
Oh, all right there isn’t a 2008 ISDA. Never was. This one is a running JC in-joke. Talking to yourself might not be the first sign of madness, but having in-jokes with yourself might be. From the blurb to Hunter Barkley’s 2026 novel The Atlantis Variation:
… the 2008 ISDA would be a definitive, final, flawless self-aware edition of the ISDA Master Agreement. Short, plainly worded, future-proofed and agile, it would allow counterparties to agree robust trading terms with little fuss and only the cursory clerical management delivered through unskilled personnel in low-cost jurisdictions and, eventually, chatbots.
It promised to be the long-lost missing use-case for distributed ledger technology, natively negotiated “on-chain” between arrays of dematerialised large language models housed, for the sense of theatre, in a single giant data centre in the outskirts of Bucharest.
Had it been implemented, the Atlantis would have addressed the financial, infrastructural and regulatory challenges which would dog the financial derivatives market in the early 21st century, eventually bringing to the brink of an abyss the rolling countryside of Aïessdiyé, a verdant wetlands in whose folded hills, nooks and crannies peaceable, hobbity little swapsfolk had for generations made their comfortable burrows.
While they romped wealthily about their sun-drenched meadows, the ’08 would silently, effectively consolidate all documentation across a wide range of products and asset classes (including, but not limited to, repo, stock lending, prime brokerage, exchange traded derivatives, commodities and emissions), finally moving the financial world into a stable utopian state in which all risks are known, all eventualities experienced and contingencies accounted for. Risk would finally be banished for ever.
That was the theory: the reality was infinitely darker.
Schedule
All usable versions of the ISDA Master Agreement have a Schedule with a semi-rigid structure:
Part 1: Termination Provisions
Part 2: Tax Representations
Part 3: Documents for Delivery
Part 4: Miscellaneous (Schedule)
Part 5: Other Provisions
The first four parts of the Schedule fine-tune various Events of Default and Termination Events, letting the parties make certain elections and representations, setting out their tax and financial disclosures and specifying names, addresses, contact details, agents, friends and relations and so on.
Part 5 is a free-form “any other business” where your credit team can indulge its fantasies, gild the lily and you can set out agreed amendments to the pre-printed form.
A quick word on etiquette: one would never inline amend an ISDA Master Agreement — mostly they pass around the market in .pdf form, so you couldn’t anyway, but even if you could it would be unspeakably bad form to try — if you do want to make amendments to the legal or economic terms you put them in the Schedule. There are prudent legal design reasons for this, though over the years the amount of freestyle “Part 5” amendment has grown to the point where the Schedule is often longer than the Master Agreement proper.
Much of this is quite unnecessary and, for lovers of clarity and documentary elegance, a cause for great regret.
Transactions
Because the range of things you could conceivably write a swap about is unlimited, and having only ten fingers and toes, JC will have less to say about “Transactions” generally — except for Equity Derivatives, because they tend to be generic, delta-one and they are popular in the equity prime brokerage world, which is JC’s old stamping ground.
The I.S.D.A.
ISDA, which publishes the ISDA, was the “International Swap Dealers Associations, Inc.” — interesting plural, that — but in any case, outwardly a sell-side industry association.
JC’s extensive research[2] has not yielded an explanation for why ISDA ever considered itself a plural, and the chatbots he consulted all came up with absurd reasons like — and I kid you not — inclusivity, collectivity, and global representation:
“using Associations”, speculated NiGEL, “might have aimed to convey a broader representation of various swap dealers across the globe, even though it wasn’t a merger of multiple entities”. Perhaps, it continues, “founders anticipated incorporating other regions or types of swap dealers in the future, which never materialised”.
Perhaps. Or maybe it was a typo. Who knows?
In any weather, in 1993, ISDA rebranded itself as the “International Swaps and Derivatives Association, Inc.”: singular, at the same time more unitary and sounding more inclusive of buy-siders, but still in spirit the same old ISDA, stake-held predominantly by the largest swap dealers on the face of the Earth.
It may aspire to conquer the world — it encroaches on the commodities, carbon, securities financing and crypto domains — but for now, ISDA remains a “dealer-community” association, largely devoted to the swap.
Buy-side representation
These days the “buy-side lobby” is bigger, more organised and better represented than it used to be, with the following associations representing its interests:
AIMA (the Alternative Investment Management Association)
EFAMA (the European Fund and Asset Management Association)
The MFA (the Managed Funds Association) and
The AI (the Investment Association).
- ↑ There was, of course, no such thing as the 2008 ISDA. It is a plotline from Hunter Barkley’s finance fiction potboiler The Atlantis Variation.
- ↑ Let me Google that for you. I know, right.
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See also
- An analytical essay: The purpose of an ISDA
- Transaction
- Agreement
- Schedule Document