Bilaterality
Unlike many financing documents, the ISDA Master Agreement eschews understandable terms for its participants — ones that help you orient who is who: you know, like “Borrower” and “Lender”; “Bank” and “Client”; or “Buyer” and “Seller” — for the decidedly more gnomic “Party A” and “Party B”.
This derives from a working theory that gripped the First Men as they forged the deep magic that become the First ISDA: “a swap contract,” they intoned, “is an equal opportunity sort of an affair; Biblically, righteous in that one is neither a lender nor a borrower under it, but a counterparty”. A counterparty is cunisian neither one thing nor the other: it is all about possibilities of the relationship. Either fellow may owe or be owed; each has, in theory, the same likelihood as the other of being in or out-of-the-money. This is a bilateral relationship.
But with the exception of that a class of inter-dealer swap relationships, most ISDA Master Agreements are “bilateral” only really in name: one party — the swap dealer, provides swap products to a client, which consumes them. The client provides the impulse to trade; the client elects when to exercise options and terminate positions. The dealer hedges calculates values, and is burdened with regulatory capital charges if it doesn’t get its close-out netting documentation right.
This has led to two kinds of bother: firstly a bit of a squabble as to who gets to be Party A and who Party B; since dealers set up their templates to assume they are one party and not the other, when immovable object meets irresistible force it can be unseemly. furthermore, when labouring over some neatly iatrogenic co-calculation agent fallback dispute mechanism upon which your opponent is hotly insisting— you will spend far more time doing this than can ever be justified by the reward in heaven or on earth that you will get for going through the process — it is all to easy to get your Party A and Party B back to front, thus burying deep a technical deficiency that no-one will notice until the world is coming to an end, the chief credit officer is running around with her hair on fire, and everyone is glaring at the docs team because the key goddamn protection has a drafting glitch in it.