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Template:M intro isda ISDA purpose: Difference between revisions
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The {{isdama}} is, as we know, a [[Relationship contract|framework agreement]] under which parties can transact [[swap]] contracts. The ISDA has three main goals: it is a [[relationship contract]]; it is a [[Credit risk mitigation|credit risk management tool]], and it is a [[capital optimisation]] tool. | The {{isdama}} is, as we know, a [[Relationship contract|framework agreement]] under which parties can transact [[swap]] contracts. The ISDA has three main goals: it is a [[relationship contract]]; it is a [[Credit risk mitigation|credit risk management tool]], and it is a [[capital optimisation]] tool. | ||
===== Relationship contract ===== | ===== Relationship contract ===== | ||
[[File:Wedding.jpg|250px|thumb|right|A relationship contract, yesterday.]] | |||
It is a legal agreement governing the general relationship between two parties, dispensing with housekeeping matters like contact details, simplifying and streamlining the transaction process and generally setting parameters within which the parties agree to transact [[from time to time]]. The ISDA does not of itself create any obligations or liabilities, or otherwise commit anyone to any Transaction in particular. It simply provides an architecture: walls within which they may safely play; a roof over their heads under which they may comfortably dance. | It is a legal agreement governing the general relationship between two parties, dispensing with housekeeping matters like contact details, simplifying and streamlining the transaction process and generally setting parameters within which the parties agree to transact [[from time to time]]. The ISDA does not of itself create any obligations or liabilities, or otherwise commit anyone to any Transaction in particular. It simply provides an architecture: walls within which they may safely play; a roof over their heads under which they may comfortably dance. | ||
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===== Credit risk management===== | ===== Credit risk management===== | ||
It is a [[Credit risk management|credit management]] tool: it | It is a [[Credit risk management|credit management]] tool: it gives each party the tools it needs to manage and reduce its [[credit exposure]] to ''the other party'' as a result of all this derivatives trading. | ||
Here, there is a clear difference between the Master Agreement, which is all about reducing credit risk, and the {{isdaprov|Confirmation}}, which is designed to to precisely describe (but not ''reduce'', as such) ''market'' exposure under a given {{isdaprov|Transaction}}. The point of derivatives trading is to take on market exposure, of course. Counterparty credit risk is an unwanted side effect: a tail event so the terms in the {{Isdama}} provide sort of “end of days” protection, like airbags or the inflatable slides on a plane: something we definitely want on board, but sincerely hope will never be needed. | Here, there is a clear difference between the Master Agreement, which is all about reducing credit risk, and the {{isdaprov|Confirmation}}, which is designed to to precisely describe (but not ''reduce'', as such) ''market'' exposure under a given {{isdaprov|Transaction}}. The point of derivatives trading is to take on market exposure, of course. Counterparty credit risk is an unwanted side effect: a tail event so the terms in the {{Isdama}} provide sort of “end of days” protection, like airbags or the inflatable slides on a plane: something we definitely want on board, but sincerely hope will never be needed. | ||