Interpretation - ISDA Provision
2002 ISDA Master Agreement
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1 in all its glory
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Section 1 is a gentle introduction indeed to the dappled world of the ISDA Master Agreement: much of it comes from the “goes without saying, but let’s say it anyway” dept of legal wordwrightery — a large department indeed, in the annals of modern legal practice.
It wouldn’t be ISDA if there weren’t a hierarchy clause; all this really establishes is the obvious: the pre-printed ISDA Master Agreement itself sits at the bottom and is modified between the counterparties by its Schedule; once negotiated and stuck into the netting database, the Schedule basically sits there unregarded and is modified as needs be for each Transaction under the Confirmation. In point of fact the Confirmations don’t tend to modify anything in the Master and Schedule so much as build on them, but if there is a consistency — and with a document as pedantic and overwrought as the ISDA you never know — then the most specific, recently edited document will be the one that prevails.
Section 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 Transactions, such that creating a new one or terminating an old one didn’t upset the economic or legal integrity of other Transactions that were currently on foot, while at the same time creating an umbrella framework so that, should something regrettable happen to either party, all Transactions 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 Transactions executed under an multi-currency, cross-border ISDA Master Agreement.
The answer was this concept of the “Single Agreement”: the over-arching agreement that, however independent and self-contained Transactions 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).
- The JC’s famous Nutshell™ summary of this clause
- The thinking behind the “Single Agreement” concept
- Repackaging vehicles and the Single Agreement
- Assignment and its effect on netting and set-off
Equivalents in other agreements
- Single Agreement - GMRA Provision
- Single Agreement - GMSLA Provision
- Single Agreement - GTMA Provision