Preamble - ISDA Provision
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will be entering into “Transactions” governed by this 2002 Master Agreement and its “Schedule”, and a “Confirmation” evidencing those Transactions. The 2002 Master Agreement with its Schedule are the “Master Agreement”. ISDA ® International Swaps and Derivatives Association, Inc. Dated as of …………………… have entered and/or anticipate entering into one or more transactions (each a “Transaction”) that are or will be governed by this 2002 Master Agreement, which includes the schedule (the “Schedule”), and the documents and other confirming evidence (each a “Confirmation”) exchanged between the parties or otherwise effective for the purpose of confirming or evidencing those Transactions. This 2002 Master Agreement and the Schedule are together referred to as this “Master Agreement”.
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The preamble is the only place where the concept of the “Transaction” — being the actual swaps you put on under one of these confounded agreements — is defined in the ISDA Master Agreement, which talks in somewhat laboured terms about the architecture is the ISDA contract.
ISDA architecture
The legal documentation for an ISDA swap transaction comes in three main parts, but —of course— there are complications. But let's start at the beginning.
The trinity: Master, Schedule and Confirmation
Master: The first part of the trinity - God, if you feel that way inclined, is the pre-printed form of master agreement. This has 14 Sections and is inviolate.
- This contains the basic framework for your trading arrangement. 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, Representations, covenants to maintain certain standards and supply credit information, and critically Events of Default, Termination Events, and 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 sign this as is, and never edit this document. Your internal audit may not believe you and may ask for evidence of the control you have surrounding your process to make sure no-one ever in-line edits an ISDA Master Agreement. Alas internal audit’s place in your organisation is as impeachable as the ISDA Master Agreement’s is in the market, so you will have to just suck this up. But know this: No-one in-line-edits an ISDA Master Agreement. 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 5(a)(viii)”. Honestly.
- 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 Schedule.