Agreement - ISDA Provision
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2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™ Agreement in all its glory Related agreements and comparisons
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Overview
The “Agreement” is, broadly, the ISDA Master Agreement, the Schedule, any 1995 English Law CSA and, in the context of any Transaction, its Confirmation. It generally would not include a Credit Support Document (except to the extent you treat your 1995 English Law CSA, rightly or wrongly,[1] as a Credit Support Document.
Summary
The ISDA Master Agreement
The ISDA Master Agreement is the basic framework which applies to anyone who touches down on planet ISDA. There are three existing versions:
- the state-of-the-art 2002 ISDA;[2]
- the still-popular-with-traditionalists-and-Americans 1992 ISDA, and
- the all-but-retired-but-don’t-forget-there-are-still-soldiers-in-the-Burmese-jungle 1987 ISDA[3]
- the interesting-only-for-its-place-in-the-fossil-record-and-witty-acrostic 1985 ISDA Code; and
- there isn’t a 2008 ISDA. That’s a little running JC in-joke.[4]
All three versions have a tri-partite form: Pre-printed Master, Schedule and — well, this is controversial: for is it, or is it not, part of the ISDA Master Agreement? — Credit Support Annex.
Section {{ {{{1}}}|1(c)}}
Section {{ {{{1}}}|1(c)}} starts getting a bit tastier in that it comprises the Single Agreement. This is deep ISDA lore, from which all the close-out netting that gives the ISDA Master Agreement its capital efficiency wings flows.
The “single agreement” concept
Here several pieces of magic come together to create the capital foundation of the modern master trading agreement. The challenge, originally solved by the First Men, was to create an architecture that allowed discrete, unitary, complete {{ {{{1}}} |Transaction}}s, such that creating a new one or terminating an old one didn’t upset the economic or legal integrity of other {{ {{{1}}} |Transaction}}s that were currently on foot, while at the same time creating an umbrella framework so that, should something regrettable happen to either party, all {{ {{{1}}} |Transaction}}s can be quickly rounded up, evaluated, stopped and then collapsed down — “netted” — to a single amount, payable by one party to the other.
This involved some canny financial engineering. The general rules of set-off require not just a mutuality of parties to the off-setting debts, but also amounts falling due on the same day and in the same currency — neither of which was necessarily true of the independent {{ {{{1}}} |Transaction}}s executed under an multi-currency, cross-border ISDA Master Agreement.
The answer was this concept of the “{{ {{{1}}} |Single Agreement}}”: the over-arching agreement that, however independent and self-contained {{ {{{1}}} |Transaction}}s are for any other purpose, when it comes to their early termination they transmogrify themselves into the single host agreement, and are reduced to calculation inputs to the final amount which one party must pay the other. Thereby the process is not one of “set-off” at all, but of calculating a single net amount, payment of which would sort out all matters outstanding under the relationship.
Under the 2002 ISDA that single amount is labeled an “Early Termination Amount”. (It didn’t occur to the squad to label it at all before then, but the 1992 version is still often referred to as an Early Termination Amount, seeing as “the net amount determined pursuant to Section 6(e)” is a bit of a mouthful).
As far as we know, this concept first landed in the 1987 ISDA, where it was offhandedly referred to in the preamble, and was promoted to a fully-fledged subclause of Section 1 in the 1992 ISDA.
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- The JC’s famous Nutshell™ summary of this clause
- A deeper investigation into the architecture of the ISDA, how it fits together, which bits get edited and which prevails in the event of conflict.
See also
References
- ↑ Rightly, if it is a 1994 ISDA CSA (NY law) or a 2016 NY Law VM CSA; wrongly if it is a 1995 ISDA CSA or a 2016 English law VM CSA.
- ↑ There is no such thing as a 2008 ISDA. That was a joke on our part.
- ↑ Seriously: proceed with caution with one of these. 1987 ISDAs don’t have a lot of safety features a modern derivatives counterparty relies on, so only for real specialists and weirdos. Think of it like flying a spitfire rather than a 737 Max. Um, okay, bad metaphor.
- ↑ Talking to yourself might not be the first sign of madness, but having in-jokes with yourself might be.