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Section {{ {{{1}}}|1}} is a gentle introduction indeed to the dappled world of the ISDA Master Agreement: much coming from the “goes without saying, but let’s say it anyway” dept of legal wordwrightery — a large department indeed, in the annals of modern legal practice.

In a nutshell — unless you are doing repackagings, and even then, don’t get carried away — make sure you understand what Section {{ {{{1}}}|1}} is there fore, but don’t mess with it. The large slew of definitions are set out in Section {{ {{{1}}}|14}}. JC considers each in its own write in Section {{ {{{1}}}|14}}, so not much more to say here. It wouldn’t be ISDA if there weren’t a hierarchy clause; like all hierarchy clauses, this one states what ought to be obvious: the pre-printed ISDA Master Agreement itself sits at the bottom of the hierarchy, is modified by the {{{{{1}}}|Schedule}}; once that is negotiated and stuck into the netting database, the {{{{{1}}}|Schedule}} sits there, ungainly, unloved and unregarded until the Great King of Terror comes down from the sky and may be (but generally isn’t) modified as needs be for each {{{{{1}}}|Transaction}} by the {{ {{{1}}}|Confirmation}}.

In point of fact the {{ {{{1}}}|Confirmation}}s don’t tend to modify anything in the Master or {{ {{{1}}}|Schedule}}, but rather builds on them, but if there is inconsistency — and with a document as pedantic and overwrought as the ISDA Master Agreement you never know — then the most specific, recently edited document will be the one that prevails.

All of this follows from general principles of contractual interpretation and common sense communication, of course.

A message to internal audit and quality control teams

One quick point that only needs saying when busy-bodies from internal audit come on their biannual trip hunting for worms and earwigs under rocks in your neighbourhood: you — and by that we mean one — never, never, never “inline” amends the form of ISDA Master Agreement. It is sacred. Never to be edited. If, er, one wants to amend its terms — of course one does, one is a legal eagle and one’s client is special — you do that remotely by setting out the amendment in Part 5 of the {{{{{1}}}|Schedule}}.

Why labour this obvious point? Because JC has had to explain to a disbelieving external audit consultancy, retained to ensure quality control over a portfolio of tens of thousands of master trading agreements, that there was no need for a control measuring the number of agreements that had been inline amended; no need for a core-sample test, a gap analysis or a nine-month all-points operational risk deep dive to be sure that this was the case — and it was an argument that ran for three weeks and which JC almost lost.

No-one, ever, inline amends the ISDA.

The ISDA Master Agreement is shot through with unimaginative design, unnecessary verbiage and conceptual convolution, but this is one design principle the ’squad got perfectly right: “offboarding” amendments to the Schedule does several smart things: it creates a neutral standard for all participants offering no scope for interrogation by sancimonious quality controllers, it makes very clear at a glance what has changed from the standard and most importantly it disincentivises formalistic fiddling: it is a rare — though by no means unknown — kind of pedant who insists on insertions like, “Section {{{{{1}}}|2(a)(i)}} is amended by adding, “, as the case may be” before the full stop on the third line.” {{isda 1(c) summ {{{1}}}|{{{1}}}}}