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1987 ISDA Interest Rate and Currency Exchange Agreement: Difference between revisions

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1987 ISDA Interest Rate and Currency Exchange Agreement (view source)

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Well and truly out of date version of the {{isdama}}.
{{a|isda|{{image|Musket|jpg|An unloaded {{1987ma}}}}}}Well-and-truly out-of-date version of the {{isdama}}, replaced first by the {{1992isda}} and then the {{2002isda}}, the {{1987isda}} is nonetheless useful for forensic archaeologists interested to know how the state-of-the-art version got to be how it is today.<ref>There are the odd [[Fossil record|fossils]] who still insist on using it, though most of those have long-since been taken out and shot, a process now happening to disciples of the {{1992ma}}.</ref>


Replaced by the {{1992isda}}, and then the {{2002isda}}.
And it is quite the yarn: you don’t get as shot-up and crazed as an {{isdama}} without some scrapes and shootouts along the way.


===Differences between the 1987 form and the 1992 form===
Nineteen eighty-seven was a different world; the very first swap transaction<ref>Between IBM and the World Bank — see [[swap history]] for more.</ref> was only consummated six years previously. The swap master agreement was a nascent idea to streamline the documentation between counterparties, and to capture this nascent idea of [[close-out netting]], but was predicated on the legal precepts of banking facilities. An {{isdama}} is not, of course, any kind of banking facility: certainly not if it is [[Variation margin|daily-margined]], as is now required by regulation for most of the 600 trillion of swaps transacted annually.


====Reason for update====
Many of the lending-derived credit concepts in the {{isdama}} are practically redundant, but they hang on — artifacts of the great [[doctrine of precedent|dogma of precedent]].<ref>Did I say “dogma”? I meant doctrine!</ref> If it is in the agreement, it must be there for a reason, and if I cannot conceive of one that must be down to my own mental frailty, rather than the caution or basic fussiness of our forefathers and foremothers.
Principally, to:
 
So if you find something odd, check the [[fossil record]] to see if it has been there from the outset. If it has — for example, the 20-day limit on close out notices under Section {{isda87prov|6(a)}} — then there’s a fair chance the market developments of the last 32 years might have rendered it pointless.
 
===Differences between {{1987isda}} and {{1992isda}}===
The {{1992ma}} was introduced principally, to:
*'''Expand range of products covered''': Expand beyond [[interest rate derivatives]] and [[currency derivatives]] and promote the benefit of [[close-out netting]]
*'''Expand range of products covered''': Expand beyond [[interest rate derivatives]] and [[currency derivatives]] and promote the benefit of [[close-out netting]]
*'''Market Developments''': Reflect legal developments between 1987 and 1992.
*'''Market Developments''': Reflect legal developments between 1987 and 1992.
*'''[[Physical delivery]]''': Permit [[physical delivery]]
*'''{{isdaprov|Settlement Amount}}s''': Introduce greater flexibility for determining {{isdaprov|Settlement Amount}}s on termination of {{isdaprov|Transactions}} (introducing the {{isdaprov|Loss}}, {{isdaprov|Market Quotation}}, {{isdaprov|First Method}} and {{isdaprov|Second Method}} regimes thereafter replaced in the {{2002ma}} by {{isdaprov|Close-out Amount}}).
*'''Two-way payments on termination''': Under the {{1987ma}} a party may not receive termination payments (this is the "limited two-way payment" provision).
*'''Settlement netting''': more flexibility for netting groups of transactions under Section {{isda87prov|2}} - under the {{1987isda}} you could either [[net]] just within single transactions or across all {{isda87prov|Transactions}}.


====Significant Changes====
There are some others.
*'''Physcial Delivery''': Permits [[physical delivery]]
*'''{{isdaprov|Settlement Amount}}s''': Introduices greater flexibility for determining {{isdaprov|Settlement Amount}}s upon termination of {{isdaprov|Transactions}} (the {{isdaprov|Loss}}, {{isdaprov|Market Quotation}}, {{isdaprov|First Method}} and {{isdaprov|Second Method}} regimes were introduced, subsequently refined by the {{2002ma}} into {{isdaprov|Close-out Amount}}).
*'''Two-Way Payments on Termination''': Inder the {{1987ma}} a party may not receive termination payments (this is the "limited two-way payment" provision).
*'''Settlemnent netting''': more flexibility for netting groups of transactions under Section 2 - under the {{1987ma}} you could either net just within single transactions or across all Transactions.
 
there are some others - a helpful guide can be found [http://www.google.co.uk/url?sa=t&rct=j&q=difference%20between%201987%20isda%20and%201992%20isda&source=web&cd=6&ved=0CFYQFjAF&url=http%3A%2F%2Fwww.otcguide.com.au%2Fotcwr%2Fpdf%2F1573077_6.pdf&ei=3uwkUOSYOdOChQf71IGYCw&usg=AFQjCNGsjOd2eJW8xzQhB-xeglU_-EUuCA here]
 
===Netting===
Generally speaking:
*'''Physical Settlement''': given that the {{1987ma}} doesn't include physical delivery provisions, if you have any physically settled trades under it, you'd need to also add boilerplate language in the master to ensure the close-out mechanic worked for them, including consequential amendments to Sections 5 and 6 of the 1987 master.
*'''Bankruptcy and Automatic Early Termination''': section 5(a)(vii) of the {{1987ma}} is loosely drafted and includes events which it may be difficult to determine with accuracy. (esp. subsections (2), (7), and (8). This may raise questions as to the enforceability of the second sentence of Section 6(a), which provides for the deemed occurrence of an {{isdaprov|Early Termination Date}} ''automatically'' upon the occurrence of an event falling within the Bankruptcy Event of Default. For example, although it will be clear when a petition for a winding up order has been filed, it will be unclear generally whether the deemed occurrence of the Early Termination Date took effect with respect to an event falling within sub-clause (2) at some time preceding the filing.
In contrast, {{isdaprov|Automatic Early Termination}} under the {{1992ma}} and {{2002ma}}, if elected, does not apply to those events that are uncertain as to the precise time of their occurrence. Therefore, the enforceability of {{isdaprov|Automatic Early Termination}} in the {{1992ma}} and the {{2002ma}} cannot be called into question on the basis of the uncertainty created by the inclusion of the events in the {{1992ma}} and {{2002ma}} equivalent to those in the {{1987ma}} referred to above.
 
====Relevant Provisions====
{{isdaquote|{{clause|1987|ISDA|Interest Rate and Currency Exchange Agreement|5(a)(vii)}}|5(a)(vii)|1987}}
{{isdaquote|{{clause|1987|ISDA|Interest Rate and Currency Exchange Agreement|6(a)}}|6(a)|1987}}


{{isdaanatomy}}
{{sa}}
*{{1992ma}}
*{{2002ma}}
*[[1985 ISDA Code of Standard Wording, Assumptions and Provisions for Swaps]]
{{ref}}
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