Template:Isda 1(c) summ

Section {{ {{{1}}}|1(c)}}

Section {{ {{{1}}}|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.

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 {{ {{{1}}}|Transaction}}s, such that creating a new one or terminating an old one didn’t upset the economic or legal integrity of other {{ {{{1}}}|Transaction}}s 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 {{ {{{1}}}|Transaction}}s 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 {{ {{{1}}}|Transaction}}s executed under a multi-currency, cross-border ISDA Master Agreement.

Their solution was this concept of the “{{ {{{1}}}|Single Agreement}}”: the over-arching agreement that, however independent and self-contained {{ {{{1}}}|Transaction}}s 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.

Under the 2002 ISDA that single amount is labeled an “Early Termination Amount”. (It didn’t occur to the squad to label it at all before then, but the 1992 version is still often referred to as an Early Termination Amount, seeing as “the net amount determined pursuant to Section 6(e)” is a bit of a mouthful).

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.