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-the-money).

Now the ISDA Master Agreement itself never uses the terms “Party A” or “Party B”. Being genuinely bilateral, it never has to. The labels are arbitrary assignations that apply at trade level. They only appear in the Schedule and in Confirmations, to be clear who is who on a given trade: who pays the fixed rate and who the floating; which thresholds, maxima, minima, covenants, details, agents and terms apply to which counterparty. The ISDA Master Agreement assumes you already know who is who, having agreed it in the Schedule.

So we agree: for this relationship we will call you Party B, and me 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. This is just the sort of thing a four-eyes check will miss: when dropping in your PPF Event template rider for that one time in a thousand when you are not Party A, it is easy to forget to invert the labels. If you do forget, no-one will never know — unless and until it is way too late.

But 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. We should not let ourselves forget: beyond the comparatively rare interdealer universe, there will be a “dealer” and there will be a “customer”. Their roles are different, and it behoves us not to forget. In recent years — ironically, just as the dealer vs customer dynamic has become more pronounced — the regulatory approach has kidded itself to the contrary.