ISDA Master Agreement

AAA

DEFINITION of 'ISDA Master Agreement'

A standard agreement used in over-the-counter derivatives transactions. The ISDA Master Agreement, published by the International Swaps and Derivatives Association (ISDA), is a document that outlines the terms applied to a derivatives transaction between two parties. Once the two parties agree to the standard terms, they do not have to renegotiate each time a new transaction is entered into.

INVESTOPEDIA EXPLAINS 'ISDA Master Agreement'

Unlike exchange-traded derivatives, over-the-counter derivatives are traded between two parties and not through an exchange or intermediary. The huge values and volumes in the OTC market increases the pressure on traders to make sure they are not exposed to undue risk, which is something that can easily creep up in two party negotiations. These risks prompted the creation of the ISDA Master Agreement in 1985, and the agreement is now well known and widely-used.

Using the ISDA Master Agreement in derivatives trading has several advantages. It provides both parties with clear definitions of all contract terms, and because it can take a long period of time to negotiate, both parties are likely to be very familiar with its material. Using a master agreement keeps the two parties from having to enter into new rounds of negotiations for future transactions, which saves time and legal fees. The ISDA Master Agreement also makes close-out and netting easier, as it bridges the gap between various standards used in different jurisdictions.

RELATED TERMS
  1. Interest-Rate Derivative

    A financial instrument based on an underlying financial security ...
  2. Over-The-Counter - OTC

    A security traded in some context other than on a formal exchange ...
  3. Derivative

    A security whose price is dependent upon or derived from one ...
  4. Equity Derivative

    A derivative instrument with underlying assets based on equity ...
  5. Price Swap Derivative

    A derivative transaction in which one party guarantees a fixed ...
  6. International Swaps and Derivatives ...

    An association created by the private negotiated derivatives ...
Related Articles
  1. Credit & Loans

    Watch Out For Changes In Credit Card Agreements

    If a credit card company changes its terms, you could pay a steep price. Find out how to stay informed.
  2. Options & Futures

    Why Forward Contracts Are The Foundation Of All Derivatives

    This article expands on the complex structure of derivatives by explaining how an investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward ...
  3. Options & Futures

    Careers In The Derivatives Market

    The growing interest in and complexity of these securities means opportunities for job seekers.
  4. Fundamental Analysis

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  5. Bonds & Fixed Income

    A Guide To Real Estate Derivatives

    These instruments provide exposure to the real estate market without having to buy and sell property.
  6. Credit & Loans

    How To Read Loan And Credit Card Agreements

    The devil is always in the details! Find out what you're signing yourself up for.
  7. Options & Futures

    Introduction To Weather Derivatives

    Learn about a financial instrument that makes temperature a tradable commodity.
  8. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  9. Retirement

    Create A Pain-Free Postnuptial Agreement

    This marital contract can underline your love for each other - not undermine it.
  10. Options & Futures

    REX Agreements Climb As House Prices Decline

    These purchase options let you hedge against a decline in your home's value without having to sell the house.

You May Also Like

Hot Definitions
  1. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  2. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  3. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  4. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
  5. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor ...
  6. Dividend Discount Model - DDM

    A procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The ...
Trading Center