ISDA Master Agreement

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ISDA Anatomy

incorporating our exclusive ISDA in a NutshellTM

Resources Wikitext | Nutshell wikitext | 1992 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA
Navigation Preamble | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
Events of Default: 5(a)(i) Failure to Pay or Deliver5(a)(ii) Breach of Agreement5(a)(iii) Credit Support Default5(a)(iv) Misrepresentation5(a)(v) Default Under Specified Transaction5(a)(vi) Cross Default5(a)(vii) Bankruptcy5(a)(viii) Merger without Assumption
Termination Events: 5(b)(i) Illegality5(b)(ii) Force Majeure Event5(b)(iii) Tax Event5(b)(iv) Tax Event Upon Merger5(b)(v) Credit Event Upon Merger5(b)(vi) Additional Termination Event

Foundational concepts

Architecture

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;[1]
  • 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[2]
  • 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.[3]

All three versions have a tri-partite form: Pre-printed Master, {{{{{1}}}|Schedule}} and — well, this is controversial: for is it, or is it not, part of the ISDA Master Agreement? — Credit Support Annex.

Pre-printed master

The first part of the trinity is the pre-printed form of ISDA Master Agreement.

  • Content: The ISDA Master Agreement has 14 “Sections” and is inviolate. It doesn’t have much to say about any particular Transaction, but just assumes you will be entering lots of them, and provides for general terms that apply to all of them. So, {{{{{1}}}|Representations}}, covenants to maintain certain standards and supply credit information, and critically {{{{{1}}}|Events of Default}}, {{{{{1}}}|Termination Events}}, and {{{{{1}}}|Close-out}} rights. Close-out is deep ISDA lore: this is what almost all of the excitement in an ISDA negotiation is about, and there will be much more to say about it later.
  • You don’t edit it: You don’t, despite the darkest fears of your internal audit department, ever edit this document. Ever. This is by quite deliberate design. Everyone in the market knows the ISDA intimately, and there is good comfort in knowing, when it comes to that terrible moment when, as the world goes to hell, you have to understand your rights and obligations, that you don't have to read the 19 pages of the pre-print as well. Even the pagination and line-layout is sacrosanct: Some connoisseurs cherish the Schedule amendment which purports to excise “the third word of the second line of limb (b) of Section {{{{{1}}}|5(a)(viii)}}”. Honestly. The ISDA Master Agreement’s generally a .pdf, so you can’t[4] but, in any weather, you don’t.[5] You just don’t.
  • You do amend it: But, of course, an ISDA Master Agreement is nothing without a long and pointless negotiation to amend, augment or clarify this agreement! And to be sure you can amend an ISDA, but you do this is by providing for an amendment in your ...

ISDA {{{{{1}}}|Schedule}}

This overlays the pre-printed master agreement. Here you specify {{{{{1}}}|Additional Termination Event}}s, add economic variables, names, addresses, add {{{{{1}}}|Tax Representations}} and then, in Part 5, you are free to make any technical amendments your credit and legal chicken lickens want for the avoidance of doubt, and that you couldn't make because technical ineptitude and unerring market convention prevented you editing the preprinted master. That comprises your overarching ISDA Master Agreement, though you may also have a ...

Credit support arrangement

The credit support arrangement usually takes the form of an annex to the ISDA Master Agreement. It may be under English law or New York law. The English law CSA has 11 “Paragraphs”; the 1994 New York law CSA — which has fiddly and rather pointless security provisions — has 13, in each case the last one being an editable schedule of Elections and Variables. Like the ISDA Master Agreement you don’t edit the pre-printed Paragraphs. Now in order to document a specific {{{{{1}}}|Transaction}} you will need a...

Confirmation

The {{{{{1}}}|Confirmation}} is the thing that actually documents a specific swap {{{{{1}}}|Transaction}}. This you can edit, to your heart’s content. There is sometimes an intermediate Master Confirmation Agreement which documents the generic terms for all, say equity derivative {{{{{1}}}|Transaction}}s.

Big drafting issues
Netting
  • The importance of close-out netting
  • Netting opinions
  • Counterparty types
  • Automatic Early Termination
  • Collateral
  • Multibranch parties
Collateral

How the CSA works

  • Title transfer versus pledge
  • “Equivalent” credit support
  • Independent Amounts
  • Changes wrought by regulations for variation margin
  • Valuation of collateral and exposure values
Tax representations
Notices and communications
Definitions booklets
Process issues
  • Capacity and authority
  • Onboarding and AML
  • Static data and netting flags
Who are the stakeholders?
    • Credit
    • Treasury
    • Legal
    • Trading
    • Sales


See also

  • 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.
  • I know you can, but you are forgetting about the general technical aptitude of your average ISDA negotiator who can’t figure out how to get goddamn tab stops to work.
  • “But what if we did?” wails internal audit. How would you know? This is your chance to pull the exasperated Kermit face. It won’t help, of course, but you may feel better.