Interpretation - ISDA Provision

From The Jolly Contrarian
Jump to navigation Jump to search
2002 ISDA Master Agreement

A Jolly Contrarian owner’s manual™

1 in a Nutshell

The JC’s Nutshell summaries are moving to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get them here. Sign up at Substack.

1 in all its glory

1 Interpretation

1(a) Definitions. The terms defined in Section 14 and elsewhere in this Master Agreement will have the meanings therein specified for the purpose of this Master Agreement.
1(b) Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement, such Confirmation will prevail for the purpose of the relevant Transaction.
1(c) Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and the parties would not otherwise enter into any Transactions.

Related agreements and comparisons

Click here for the text of Section 1 in the 1992 ISDA
Click to compare this section in the 1992 ISDA and 2002 ISDA.

Resources and Navigation

This provision in the 1992

Resources Wikitext | Nutshell wikitext | 1992 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA | JC’s ISDA code project
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

Index: Click to expand:



But for some refreshing loosie-goosiness in the 2002 ISDA about where one might otherwise define terms, the text of Section 1 is the same in each version of the ISDA Master Agreement.



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.

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 fore, but don’t mess with it.

Section 1(a)

The large slew of definitions are set out in Section 14. the 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; 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)

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).

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.

Premium content

Here the free bit runs out. Subscribers click 👉 here. New readers sign up 👉 here and, for ½ a weekly 🍺 go full ninja about all these juicy topics 👇
  • 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

See also


Equivalents in other agreements