Template:Isda 1(c) summ

Section 1(c)

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 wings flows.

Here several pieces of ISDA magic come together to create the capital foundation of the ISDA Master Agreement. The challenge was creating 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, 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 netted down to a single sum.

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

The answer 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 themselves into the single host agreement, and are reduced to 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, by the 2002 ISDA being labelled the Early Termination Amount, payment of which would sort out all matters outstanding under the relationship.

As far as we know, this concept first landed in the 1987 ISDA, where it was offhandedly referred to in the preamble, and was promoted to a fully-fledged subclause of Section 1 in the 1992 ISDA.