Insights

The fixed part or “pre-printed part” of the Master Agreement (with definitions and other fixed contractual terms).

It includes definitions and other fixed contractual terms.

For both the 1992 and 2002 ISDA agreements, this part is made of:

- a preamble that briefly and generally presents the relationship between the parties, the role of the agreement and the ISDA documentation structure;

- 14 sections

 - and a signature block at the end.

The fixed part of the Master Agreement can only be modified through the Schedule or  other documents of the Master Agreement suite.

The Schedule is the part of the Master Agreement where the parties can modify the terms included in the pre-printed document. It includes the terms specific to the parties’ respective structure (e.g. fund or bank), location, choice of applicable law. risk appetite and sometimes purpose of the agreement (e.g. hedging transactions).

It is the main document that the parties negotiate.

The standard Schedule that comes with the ISDA pre-printed form includes the following terms:

Indication "Schedule to the Master Agreement" and "Schedule to the 2002 Master Agreement";

the date of the agreement (“as of” date);

a reference to the name of the parties and their respective identification as “Party A” or “Party B” of the agreement;

then the parts below:

1. Termination Provisions

2. Tax Representations

3. Agreement to Deliver Documents

4. Miscellaneous

5. Other Provisions

(Parts 1, 2 and 3 of the Schedule are relatively self-explanatory. 

In Part 4 you will find under the denomination “Miscellaneous” items such as parties addresses for notices, calculation and process agents, netting of payment (different from close-out netting), governing law and credit support terms.

In Part 5, the standard ISDA Schedule only reference the title “Other Provisions” without any standard provisions. In essence it serves as a place marker for parties to add any terms they want that do not fit in the other parts);

a signature block at the end.

There is a fair number of changes between these two versions of the ISDA MA. Of course, all the changes don’t have the same significance. Some of the most notable ones are presented below.

Close-Out 

Introduction of Close-Out Amount to replace Market Quotation/Loss to determine the amount owed between the parties in case of early termination. The Close-Out Amount is a combination of the Market Quotation/Loss with added consideration for good faith and commercial reasonableness.

Changes to Events of Default:

Reduction of the grace periods for certain Event of Default (“EoD”): 

-  from 3 Local Business Day (“LBD”) to 1 LBD or 1 Local Delivery Day for Failure to Pay or Deliver (Section 5(a)(i));

-  from 30 days to 15 days for Bankruptcy (Section 5(a)(vii)) (stay or dismissal of bankruptcy, liquidation proceedings or trigger of a security).

-  from 3 to 1 LBD for Default Under Specified Transaction (Section 5(a)(v)) in relation to a final payment due at maturity of an obligation or any other early termination payment due in relation to a Specified Transaction.

Repudiation of Agreement is added to the pre-existing Breach of Agreement (Section 5(a)(ii)) Event of Default (applicable to the ISDA MA and any Confirmation) 

The scope of Default Under Specified Transaction (Section 5(a)(v)) has been extended to include 

(i)  delivery defaults in relation to Specified Transaction or any credit support arrangement relating to a Specified Transaction where such defaults would impact all outstanding transactions under the relevant documentation; and 

(ii)  repudiation or disaffirmation of a Specified Transaction or any credit support arrangement relating to a Specified Transaction in each case that has been confirmed by a party to the agreement or its Credit support Provider or Specified Entity.

The Cross Default (Section 5(a)(vi)) has been tightened to the effect that the amounts considered to reach the applicable Threshold (default relating to Specified Indebtedness and failure to pay) can be aggregated in order to cure the perceived flaw in the terms of the 1992 ISDA MA where each set of default was considered separately when applied to the applicable Threshold.

In the Bankruptcy Event of Default (Section 5(a)(vii)) the scope of the events that don’t benefit from a grace period has been expanded to include formal insolvency, winding up or liquidation proceedings instituted by a party itself, a regulator or any official entity.

Changes to Termination Events:

Illegality (Section 5(a)(i)) terms have been tightened by inclusion of a requirement to give effect to the relevant disruption fallback or remedy. In addition a specific reference to the “Office through which a party makes or receives payments or delivery has been added to characterise the Illegality.

Introduction of Force Majeure (Section 5(b)(ii)) as a Termination Event. Parties to a 1992 ISDA could either add such a clause by way of amendment to their agreement or by signing up to the ISDA Illegality/Force Majeure Protocol. The ISDA Force Majeure Termination Event does not define in details what events may constitute Force Majeure. Rather, it presents the conditions of application of Force Majeure (i.e. it becomes impossible or impractical for a party’s relevant office to perform its duties or comply with its obligation under the agreement).

Credit Event Upon Merger (Section 5(b)(v)) Pre-existing terms have been expanded by the Introduction of “Designated Event” to take into account changes affecting the structure and creditworthiness of a party, its Credit Support Provider or applicable Specified Entity without affecting their respective corporate existence.

Hierarchy of Event clause (Section 5(c)) This clause clarifies the options of the parties when an event constitutes an Illegality, Force Majeure, Event of Default or a Termination Event. 

Illegality and Force majeure have precedence over certain Event of Defaults (Failure to Pay or Deliver, Breach of Agreement or Credit Support Default) as long as such an event relates to a payment or delivery obligation or breach of agreement by the parties or a Credit Support Provider; 

In any other case an Event of Default or a Termination Event has precedence over Illegality/Force Majeure;

Illegaly has precedence over Force Majeure.

Others:

The Set-off clause (Section 6(f)) is included in the agreement. Previously, it was not included in the body of the standard ISDA 1992 but only added through the User’s Guide to the ISDA 1992 Agreement. The aim behind the Set-off clause is to enable the parties to compensate debts beyond the scope of the ISDA.

Offices; Multibranch Parties (Section 10) terms have been amended to provide more details.

The Jurisdiction clause (Section 13) has been amended to cover any dispute connected to the agreement and the exclusive or non-exclusive jurisdiction of the English courts has been clarified. In addition the reference to the Civil Jurisdiction and Judgement Act 1982 has been removed.

Interest and Compensation (Section 9(h)) New clause that consolidates and details the penalties and compensation payable in case of late delivery or late payment both before and after an Early Termination Date.

The definition of Specified Transaction (Section 14) has been expanded to include transactions beyond those covered under an ISDA MA (e.g. repo or securities lending transactions).

Confirmations can be any document or item that evidences a transaction between the parties (including data files).

ISDA standard Confirmation forms can be:

Short form (such confirmation references and relies on the existing master agreement between the parties and includes terms specific to the relevant transactions types and their economics) including Master Confirmation Agreements  ("MCA") which are not so "short" per se; or 

Long form (In the absence of negotiated ISDA Master Agreement between the parties, such confirmation references a non negotiated ISDA MA standard form as well as the necessary economic terms of the transactions between the parties).

The ISDA products definitions documents (cf. list below in "Definitions" ) include examples of confirmation agreements relevant to each type of products.

In general confirmations are handle by the back office or the operations department of the parties to transactions.

When it comes to the ISDA agreements, there are various sets of definitions included in the body of each document forming part of the ISDA Master Agreement structure. In addition, the definitions also refer to specific terms applicable to certain transaction types only. Most of the transaction specific set of definitions have evolved throughout the years in order to reflect the changes affecting the documentation, regulation or trading of certain products. Therefore it is important to ensure that one is using the relevant version of the definitions. 

ISDA has produce ad hoc definitions sets for the products below:

-  commodity derivatives;

-  credit derivatives;

-  equity derivatives;

-  FX derivatives;

-  government bond options;

-  inflation derivatives;

-  interest rate and currency derivatives;

-  property index derivatives.

In the context of the ISDA MA, a few terms relate to netting: 

-  payment netting (compensation effected during the “normal” life of the transactions if the parties so choose);

-  set off (compensation between creditor and debtor granted by law or contractual agreement);

-  close-out netting (mechanism that when applicable enables the parties to offset their debts in relation to the transactions covered by their ISDA MA).

For this section we will concentrate on the close-out netting. Indeed, it is one of the key features of the ISDA MA. It is a crucial risk mitigation tool. Within the context of a bilateral trading relationship the parties to derivatives transactions may owe each other payments. In case of insolvency of one party, insolvency rules in many jurisdictions would operate a freeze or a delayed transfer of the out payments of the insolvent party, thus creating a situation where an insolvent party (or its receiver or liquidator) would receive payments but would not have to pay its debts to the solvent party for an indefinite period (especially for unsecured debts). Such situation could be a major credit risk issue for the solvent party. The ISDA MA close-out netting, when applicable, operates as an exception to such process. It enables the parties to compensate the amounts they owe each other and to end up with a net amount that one party owe the other. In addition to serving as a a great risk mitigation tool, such mechanism has an impact on the reserves that certain financial entities must set aside for regulatory purposes (cf. capital ratio rules). Having said that, It is important to keep in mind that the enforceability of close-out provisions is not automatic and it requires a legal verification for each relevant jurisdiction. Hence, the ISDA has commissioned a series of legal opinions to that end (for a list of available list of legal opinion see (https://www.isda.org/opinions-overview/ ). Of course, relevant parties can also commissioned their own legal opinions.

The credit support annexes are add-on agreements that form part of the Schedule to the ISDA enabling the parties to exchange collateral or margin to protect their credit and counterparty risk.

The UK or NY versions of the documents were originally the most common documents used in the market (outside of Japan). In short, the title transfer version of the CSA (UK law) is meant to operate an outright title transfer over the assets delivered as collateral. Whereas the security interest versions of the documents (NY law security interest and UK law Deed) are meant to constitute a security that chrysalises in case of default.

Writing this section pre 2016 would have presented less challenges than writing it today, and here is why: Talking about credit support documents pre 2016 would have yielded a relatively limited number of answers. We would be mostly considering the following documents:

Original Credit Support Annexes: 1994 (NY)/1995 (UK) Credit Support Annexes – 1995 Japanese Law Credit Support Annex

· 1994 ISDA Credit Support Annex (NY Law)

· 1995 ISDA Credit Support Annex (UK Law)

· 1995 ISDA Credit Support Deed (UK Law)

· 1995 ISDA Credit Support Annex (Japanese Law)

Then in 2016, in accordance with the new global regulatory requirements that followed the Lehman Brothers melt down and the ensuing global financial crisis, a new set of collateral/margin documents were created and published. The new regulatory requirements (BCBS IOSCO “Margin requirements for non-centrally cleared derivatives”rules[1] https://www.iosco.org/library/pubdocs/pdf/IOSCOPD480.pdfas implemented in each relevant jurisdiction) made it mandatory to exchange collateral/margin for uncleared derivatives either under the form of variation margin or initial margin. Note that the nature of the parties or their transactions dictates the type of margin they are required to exchange. Hence the following documents were created by ISDA:

2016 Variation Margin Credit Support Annexes

· 2016 Credit Support Annex for Variation Margin (NY Law)

· 2016 Credit Support Annex for Variation Margin (UK Law)

· 2016 Credit Support Annex for Variation Margin (Japanese Law)

Note that the French and Irish versions of the documents whilst bearing the 2016 reference are recent additions following BREXIT and the creation of the French Law and Irish Law master agreements.

[1] https://www.iosco.org/library/pubdocs/pdf/IOSCOPD480.pdf

Variation Margin ("VM") Credit Support documents:

2016 Credit Support Annex for Variation Margin (NY Law) 

2016 Credit Support Annex for Variation Margin (UK Law) 

2016 Credit Support Annex for Variation Margin (French Law) 

2016 Credit Support Annex for Variation Margin (Irish Law) 

2016 Credit Support Annex for Variation Margin (Japanese Law) 

2018 Initial Margin ("IM") Credit Support Annexes

2018 Credit Support Annex for Initial Margin - Security Interest (NY Law)

Brexit Credit Support Documents

1995 ISDA Credit Support Annex (French Law)*

*Translated versions of the document are available on the ISDA website. 

1995 ISDA Credit Support Annex (Irish Law) 

VM/IM CSD (French or Irish Laws) 

In terms of structure, just like the ISDA Master Agreements, the Credit Support Annexes/Documents include a fixed part or “pre-printed part” (with definitions and other fixed contractual terms) and a modifiable part an “Annex” that contains elections and variables (i.e. margin elections, collateral types, amendments to the fixed terms and other operational terms). The first paragraph mentioned in the Annex is a good indication of the type of document one is dealing with: In a nutshell: 

- Paragraph 11: English Law Title Transfer Annex 

- Paragraph 13: NY Law Security Interest Annex or English law Security Deed  

The Global Master Repurchase Agreement (GMRA) is a standardised contract published by the International Capital Market Association (ICMA) to govern (mainly bilateral) global repo transactions. 

An agreement which has had a few versions:

2011 SIFMA / ICMA Global Master Repurchase Agreement

2000 TBMA/ISMA Global Master Repurchase Agreement

1995 PSA/ISMA Global Master Repurchase Agreement

An agreement to cover global repo transactions:

A repurchase agreement (repo) is a financial transaction where one party sells an asset (typically debt or equity securities) to another party at an agreed price, with a commitment to repurchase the same or a similar asset at a future date or upon demand. This transaction essentially functions as a short-term loan, with the asset sold acting as collateral to mitigate credit risk 

Repo transactions play several critical roles in financial markets:

1. Safe Investment: Allows one party to invest cash securely, backed by collateral.

2. Cheap Borrowing: Enables the counterparty to borrow cash at favourable rates, reflecting the value of the collateral provided.

3. Yield Enhancement: One party can earn a return by lending an asset that is in demand, receiving cash that can be reinvested for profit.

4. Short-Selling and Short-Covering: The counterparty can borrow an asset to sell short or to settle existing sales.

Structure of the GMRA: 

The GMRA consists of two main components:

I. Fixed Pre-Printed Part: Contains 21 paragraphs that cover essential aspects of the agreement, including:

1. Applicability

2. Definitions

3. Initiation; Confirmation; Termination

4. Margin Maintenance

5. Income Payments

6. Payment and Transfer

7. Contractual Currency

8. Substitution

9. Representations

10. Events of Default

11. Tax Event

12. Interest

13. Single Agreement

14. Notices and Other Communications

15. Entire Agreement; Severability

16. Non-assignability; Termination

17. Governing Law

18. No Waivers, etc.

19. Waiver of Immunity

20. Recording

21. Third Party Rights

II. Annex I - Supplemental Terms or Conditions: 

This section allows parties to include amendments to the fixed part, economic terms, operational terms, and specific annexes as needed.

+ several annexes to address specific product requirements:

- Buy/Sell Back Annex

- Bills Annex

- Agency Annex

- Canadian Annex

- Equities Annex

- Gilts Annex

- Italian Annex

- Japanese Annex

- Russian Annex