1987 ISDA Interest Rate and Currency Exchange Agreement: Difference between revisions

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1987 ISDA Interest Rate and Currency Exchange Agreement (view source)

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{{isda87anat|5(a)(vii)}}
{{isda87anat|6(a)}}
Well and truly out of date version of the {{isdama}}.
Well-and-truly out-of-date version of the {{isdama}}, replaced firsst by the {{1992isda}} and then the {{2002isda}}, the {{1987isda}} is nonetheless useful for forensic archaeologists interested to know how the state of the art version got to be how it is today<ref>There are the odd fossils who still insist on using it, though most of those have long-since been taken out and shot, a process now happening to disciples of the {{1992ma}}.</ref>. Nineteen eighty-seven was a different world; the very first swap transaction<ref>Between IBM and the World Bank — see [[swap history][] for more.</ref> was only consummated in 1981. The swap master agreement was a nascent idea to streamline the documentation between counterparties, and to capture this nascent idea of [[close-out netting]], but was basically predicated on the legal precepts of banking facilities. An {{isdama}} is not, of course, any kind of banking facility: certainly not if it is [[Variation margin|daily-margined]], as is now required by regulation for most of the 600 trillion of swaps transacted annually.  


Replaced by the {{1992isda}}, and then the {{2002isda}}.
Many of the lending-derived credit concepts in the {{isdama}} are practically redundant, but they hang on — artifacts of the great [[doctrine of precedent|dogma of precedent]]<ref>Did I say “dogma”? I meant doctrine!</ref>. If it is in the agreement, it must be there for a reason, and if I cannot conceive of one that must be down to my own mental frailty, rather than the caution or basic fussiness of our forefathers and foremothers.


==Differences between 1987 and 1992 Master Agreements==
So if you find something odd, check the [[fossil record]] to see if it has been there from the outset. If it has — for example, the 20-day limit on close out notices under Section {{isda87prov|6(a)}} — then there’s a fair chance the market developments of the last 32 years might have rendered it pointless.
the {{1992ma}} was introduced principally, to:
 
===Differences between {{1987isda and {{1992isda}}===
The {{1992ma}} was introduced principally, to:
*'''Expand range of products covered''': Expand beyond [[interest rate derivatives]] and [[currency derivatives]] and promote the benefit of [[close-out netting]]
*'''Expand range of products covered''': Expand beyond [[interest rate derivatives]] and [[currency derivatives]] and promote the benefit of [[close-out netting]]
*'''Market Developments''': Reflect legal developments between 1987 and 1992.
*'''Market Developments''': Reflect legal developments between 1987 and 1992.
 
*'''[[Physical delivery]]''': Permit [[physical delivery]]
===Significant Changes===
*'''{{isdaprov|Settlement Amount}}s''': Introduce greater flexibility for determining {{isdaprov|Settlement Amount}}s on termination of {{isdaprov|Transactions}} (introducing the {{isdaprov|Loss}}, {{isdaprov|Market Quotation}}, {{isdaprov|First Method}} and {{isdaprov|Second Method}} regimes thereafter replaced in the {{2002ma}} by {{isdaprov|Close-out Amount}}).
*'''Physcial Delivery''': Permits [[physical delivery]]
*'''Two-way payments on termination''': Under the {{1987ma}} a party may not receive termination payments (this is the "limited two-way payment" provision).
*'''{{isdaprov|Settlement Amount}}s''': Introduices greater flexibility for determining {{isdaprov|Settlement Amount}}s upon termination of {{isdaprov|Transactions}} (the {{isdaprov|Loss}}, {{isdaprov|Market Quotation}}, {{isdaprov|First Method}} and {{isdaprov|Second Method}} regimes were introduced, subsequently refined by the {{2002ma}} into {{isdaprov|Close-out Amount}}).
*'''Settlement netting''': more flexibility for netting groups of transactions under Section {{isda87prov|2}} - under the {{1987isda}} you could either [[net]] just within single transactions or across all {{isda87prov|Transactions}}.
*'''Two-Way Payments on Termination''': Inder the {{1987ma}} a party may not receive termination payments (this is the "limited two-way payment" provision).
*'''Settlemnent netting''': more flexibility for netting groups of transactions under Section 2 - under the {{1987ma}} you could either net just within single transactions or across all Transactions.


there are some others - a helpful guide can be found [http://www.google.co.uk/url?sa=t&rct=j&q=difference%20between%201987%20isda%20and%201992%20isda&source=web&cd=6&ved=0CFYQFjAF&url=http%3A%2F%2Fwww.otcguide.com.au%2Fotcwr%2Fpdf%2F1573077_6.pdf&ei=3uwkUOSYOdOChQf71IGYCw&usg=AFQjCNGsjOd2eJW8xzQhB-xeglU_-EUuCA here]
there are some others - a helpful guide can be found [http://www.google.co.uk/url?sa=t&rct=j&q=difference%20between%201987%20isda%20and%201992%20isda&source=web&cd=6&ved=0CFYQFjAF&url=http%3A%2F%2Fwww.otcguide.com.au%2Fotcwr%2Fpdf%2F1573077_6.pdf&ei=3uwkUOSYOdOChQf71IGYCw&usg=AFQjCNGsjOd2eJW8xzQhB-xeglU_-EUuCA here]
==Close-out Netting under the {{1987ma}}==
It can be done, but tread carefully: the somewhat agricultural {{isdaprov|Automatic Early Termination}} provision may cause problems. Generally speaking:
*'''Physical Settlement''': given that the {{1987ma}} doesn't include physical delivery provisions, if you have any physically settled trades under it, you'd need to also add boilerplate language in the master to ensure the close-out mechanic worked for them, including consequential amendments to Sections 5 and 6 of the 1987 master.
*'''Bankruptcy and Automatic Early Termination''': section 5(a)(vii) of the {{1987ma}} is loosely drafted and includes events which it may be difficult to determine with accuracy. (esp. subsections (2), (7), and (8). This would be okay, except for the way '''automatic early termination works under the {{1987ma}}:
**it happens by default (in the {{1992ma}} and subsequently it has to be elected, and only would be elected in those jurisdictions where it was needed to ensure [[close-out netting]])
**it happens by reference to '''all''' of the limbs of the Bankruptcy definition, including those which are observable and definitive. AET shouldn't kick in simply where a party "takes steps in furtherance of" an insolvency filing - it should only happen at the point of that actual insolvency filing.
**That is to say the second sentence of Section 6(a) (see below) deems the occurrence of an {{isdaprov|Early Termination Date}} ''automatically'' upon the occurrence of ''any'' event falling within the Bankruptcy {{isdaprov|Event of Default}}.
By contrast, {{isdaprov|Automatic Early Termination}} under the {{1992ma}} and {{2002ma}}, if elected, does not apply to those events that are uncertain as to the precise time of their occurrence. Therefore, the enforceability of {{isdaprov|Automatic Early Termination}} in the {{1992ma}} and the {{2002ma}} cannot be called into question on the basis of the uncertainty created by the inclusion of the events in the {{1992ma}} and {{2002ma}} equivalent to those in the {{1987ma}} referred to above.


====Relevant Provisions====
====Relevant Provisions====
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