Guarantee - ISDA Anatomy

Should a client request a transaction-specific parental guarantee under an ISDA Master Agreement instead of the usual “all obligations” guarantee of all obligations under the ISDA Master Agreement and all transactions under it, escalate immediately.

Never agree to the guarantee of individual Transactions (or accepting Letters of Credit with respect to individual transactions) under an ISDA. The reason relates to the way ISDA Master Agreements are closed out:

• On a close-out of an ISDA, each transaction is terminated, the individual close-out amounts are determined, they’re aggregated up to a single net sum (i.e. negative exposures are netted off against positive ones) and the single Early Termination Payment is payable under 6(e) (Payments on Early Termination) of the ISDA Master Agreement.

• That is to say, it is not payable under the Transaction at all - it's payable under the ISDA Master Agreement itself.

• Therefore, if the guarantee relates to the single Transaction only, at precisely the point you wish to rely on it (i.e., upon that party’s default), it will vanish.

Same goes for Letters of Credit.