Template:M intro isda Party A and Party B

In this episode of the JC’s series of unfeasibly deep explorations of superficially odd things in the ISDA metaverse, we look at the curious counterparty designators in the master agreement “Party A” and “Party B”, and that curious descriptor itself, “counterparty”.

These set the ISDA apart; give it a sort of otherwordly aloofness.

Other banking and broking arrangements use labels which terms help you orient who is who: “Borrower” and “Lender”; “Bank” and “Client”; “Broker” and “Customer”; or “Buyer” and “Seller”. From the outside ISDA’s framers opted for the decidedly more gnomic “Party A” and “Party B”.

Bilaterality

This derives from the belief in even-handedness that gripped the First Men who forged the deep magic from which the First Swap was born: “a swap contract,” they intoned, “is an exchange among peers. It is an equal opportunity sort of thing; Biblically righteous in that under its awnings one be neither lender nor borrower, but an honest rival for the favour of the Lady Fortune. A counterparty”.

Swaps are different from loans and brokerage arrangements. They start off “at market”: all is square. Either party may be long, or short, fixed or floating. At the moment the trade is struck, the world infused with glorious possibilities. One’s fortunes may rise or fall relative to the other fellow’s and, as a result, one may owe (out-of-the-money) or be owed (in).

Thus, the neutral labels “Party A” and “Party B”.

Now the ISDA Master Agreement itself never uses the terms “Party A” or “Party B”. The ISDA proper, being genuinely bilateral, never has to, because they are an arbitrary assignation that only applies at trade level. The ISDA Master Agreement contains general terms only, that apply equally to both parties.

The labels only appear in the Schedule and in confirmations, and then only to be clear who is who on a give trade: positions are equal, but different: you need to know who pays the fixed rate and who the floating; which thresholds, maxima, minima, covenants, details, agents and terms apply to which counterparty. So we agree: for this relationship we will call you Party B, and I will be Party A. These colourless and generic terms hark from a time where, we presume, the idea of “find and replace all” in an electronic seemed some kind of devilish black magic.

But generic labels still lead to practical difficulties. A dealer with ten thousand counterparties in its portfolio wants to be Party A every time. If, on occasion, it cannot be, this can lead to anxious moments should the legal eagles misread the confirms for those rare occasions where it is not.

Negotiators, too, are prone to forget and this is just the sort of thing a four-eyes check will miss: when dropping in your template PPF Event rider, it is easy to forget to invert Party A and Party B labels for that one time in a hundred when you should. If you do, you will never know — unless and until it is way too late.

But for the most part there is a better objection: for all our automatic protestations to the contrary, the ISDA is not a bilateral contract, and it is a financing contract. Aside from that highly rare interdealer universe, “Dealer” and “Customer” might have been better labels from the off.