Template:Isda Preamble summ

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 is in need of a scene-setter: everyone, once, stares at that gnomic title and thinks, “okay, what on earth is this all about?”

The ISDA’s {{ {{{1}}}|Preamble}} is just the loosener before things get going. There is not a lot to see, but it casually 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, however, where the similarities with Chekhov end. 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 {{{{{1}}}|Schedule}} of elections and amendments, {{{{{1}}}|Confirmation}}s setting out the terms of {{{{{1}}}|Transaction}}s and — well, this is controversial: for is it, or is it not, part of the ISDA Master Agreement proper? — a Credit Support Annex.

ISDAs, Ancient and Modern

There are two versions still conceivably in use — the 2002 ISDA and the 1992 ISDA, which we call the “Modern ISDAs”; two more or less fully retired versions, the 1987 ISDA and the 1985 ISDA Code which we call the “Ancient ISDAs”, and one, the 2008 ISDA, that died during the act of conception and never made it to the market but exists as an apocryphal testament to the enduring, wishful optimism of derivatives lawyers the world over. We call 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 {{{{{1}}}|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 Automomous 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. One day JC will write a novel about it. Swear to God.

Schedule

All usable versions of the ISDA Master Agreement have a {{{{{1}}}|Schedule}} with a semi-rigid structure:

Part 1: {{{{{1}}}|Termination Provisions}}
Part 2: {{{{{1}}}|Tax Representations}}
Part 3: {{{{{1}}}|Documents for Delivery}}
Part 4: {{{{{1}}}|Miscellaneous (Schedule)}}
Part 5: {{{{{1}}}|Other Provisions}}

The first four parts of the {{{{{1}}}|Schedule}} fine-tune various {{{{{1}}}|Events of Default}} and {{{{{1}}}|Termination Events}} (setting {{{{{1}}}|Cross Default}} thresholds, {{{{{1}}}|Specified Entities}} and so on) allow certain elections and representations, agreeing what tax and financial disclosure each party should make and to whom, 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 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, collectvity, 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, it rebranded itself as the “International Swaps and Derivatives Association, Inc.”: singular, at the same time more unitary and more inclusive sounding, 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.

ISDA may have aspirations to conquer the world — increasingly, it seems hell-bent on doing so, encroaching 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).