Interpretation - 1987 ISDA Provision
Overview
The 2002 ISDA does the reader the service of acknowledging there might be terms defined in the schedule and not just Section 14 — as indeed there must — party-specific things like Party A, Party B, Credit Support Provider, Credit Support Document, and no doubt you can think of others — but beyond this, the text of Section 1 in the 2002 ISDA is the same as Section 1 in the 1992 ISDA.
The 1987 ISDA was broadly the same, though there was no “single agreement” subclause (c) — that is built instead into the Preamble. By 1992 ISDA’s crack drafting squad™ deemed this important enough to deserve its own place in Section 1(c), and there it stayed for the 2002 ISDA.
Summary
Section 1 is a gentle introduction indeed to the dappled world of the ISDA Master Agreement.
In a nutshell, unless you are doing repackagings — and even then, don’t get carried away — make sure you understand what Section 1 is there for and what it does, but don’t fiddle with it.
Section 1(a)
The large slew of definitions are set out in Section 14. JC considers each in its own write in Section 14, so not much more to say here.
Section 1(b)
It wouldn’t be ISDA if there weren’t a hierarchy clause; like all hierarchy clauses, this one states what ought to be obvious: the pre-printed ISDA Master Agreement itself sits at the bottom of the hierarchy, is modified by the Schedule; once that is negotiated and stuck into the netting database, the Schedule sits there, ungainly, unloved and unregarded until the Great King of Terror comes down from the sky[1] and may be (but generally isn’t) modified as needs be for each Transaction by the Confirmation.
In point of fact the Confirmations don’t tend to modify anything in the Master or Schedule, but rather builds on them, but if there is inconsistency — and with a document as pedantic and overwrought as the ISDA Master Agreement you never know — then the most specific, recently edited document will be the one that prevails.
All of this follows from general principles of contractual interpretation and common sense communication, of course.
A message to internal audit and quality control teams
One quick point that only needs saying when busy-bodies from internal audit come on their biannual trip hunting for worms and earwigs under rocks in your neighbourhood: you — and by that we mean one — never, never, never “inline” amends the form of ISDA Master Agreement. It is sacred. Never to be edited. If, er, one wants to amend its terms — of course one does, one is a legal eagle and one’s client is special — you do that remotely by setting out the amendment in Part 5 of the Schedule.
Why labour this obvious point? Because JC has had to explain to a disbelieving external audit consultancy, retained to ensure quality control over a portfolio of tens of thousands of master trading agreements, that there was no need for a control measuring the number of agreements that had been inline amended; no need for a core-sample test, a gap analysis or a nine-month all-points operational risk deep dive to be sure that this was the case — and it was an argument that ran for three weeks and which JC almost lost.
No-one, ever, inline amends the ISDA.
The ISDA Master Agreement is shot through with unimaginative design, unnecessary verbiage and conceptual convolution, but this is one design principle the ’squad got perfectly right: “offboarding” amendments to the Schedule does several smart things: it creates a neutral standard for all participants offering no scope for interrogation by sancimonious quality controllers, it makes very clear at a glance what has changed from the standard and most importantly it disincentivises formalistic fiddling: it is a rare — though by no means unknown — kind of pedant who insists on insertions like, “Section 2(a)(i) is amended by adding, “, as the case may be” before the full stop on the third line.”
Section 1(c)
There is no Section 1(c) in the 1987 ISDA. The single agreement provision is set out in the Preamble. But the single agreement concept is no less important in the 1987ma, so you may yet find the essay about it in the premium section of interest.
Premium content
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- JC’s “nutshell” summary of the clause
- Background reading and long-form essays
- The thinking behind the “Single Agreement” concept
- Repackaging vehicles and the Single Agreement
- Assignment and its effect on netting and set-off
See also
- Set-off and insolvency set-off
- Long form confirmation
- Single Agreement - GMRA Provision
- Single Agreement - GMSLA Provision
- Single Agreement - GTMA Provision
References
- ↑ © Nostradamus