What is an 'ISDA Master Agreement'

An ISDA Master Agreement is the standard document that is commonly used to govern over-the-counter derivatives transactions. The Agreement, which is published by the International Swaps and Derivatives Association (ISDA), outlines the standard terms to be applied to a derivatives transaction between two parties. The Master Agreement itself is standard, but it is accompanied by a customized Schedule and sometimes a Credit Support Agreement, both of which are signed by the two parties to a given transaction.

!--break--Over-the-counter (OTC) derivatives are traded between two parties and not through an exchange or intermediary. The size of the OTC market means that risk managers must carefully oversee traders and ensure approved transactions are properly managed. The growth of the foreign exchange and interest rate swap markets, which together account for trillions of dollars of trades daily, prompted the creation of the ISDA Master Agreement in 1985. It was subject to updates and revisions in 1992 and again in 2002. The Agreement is widely-used by banks and corporations worldwide. The ISDA Master Agreement also makes transaction close-out and netting easier, as it bridges the gap between various standards used in different jurisdictions.

Required Documentation

Most multinational banks have ISDA's in place with one another, and these usually cover all branches that are active in foreign exchange, interest rate or options trading. Banks require corporate counterparties to sign an ISDA in order to enter into swaps, and some also require them for foreign exchange transactions. While the Master is standard, some of its terms and conditions are amended and defined in the accompanying Schedule, which is negotiated to cover either (a) the requirements of a specific hedging transaction or (b) an ongoing trading relationship.

A Credit Support Annex (CSA) sometimes also accompanies the Master. The CSA stipulates the terms and conditions under which the two parties are required to post collateral to each other.

When two parties enter into a transaction, they each receive a confirmation that sets out its details and references the signed ISDA, the terms of which then cover the transaction.

Major Provisions

The Master and Schedule set out the grounds under which one of the parties can force the closeout of covered transactions due to the occurrence of a termination event by the other party. Standard termination events include failure to pay or bankruptcy. Other termination events that can be added in the Schedule include a credit downgrade below a specified level.

The Agreement stipulates whether the laws of Britain or New York State will govern, and sets out the terms for valuing, closing out and netting all covered transactions in case of a termination event.

BREAKING DOWN 'ISDA Master Agreement'

RELATED TERMS
  1. Credit Support Annex

    A credit support annex provides credit protection by setting ...
  2. Master Swap Agreement

    A basic, standardized swap contract created by the International ...
  3. International Swaps and Derivatives ...

    An association created by the private negotiated derivatives ...
  4. Credit Netting

    A system whereby the number of credit checks on financial transactions ...
  5. Termination Event

    An occurrence that will cause all or part of a swap agreement ...
  6. Trading Partner Agreement

    An agreement drawn up by two parties that have agreed to trade ...
Related Articles
  1. Trading

    ISDA Master Agreement

    The ISDA Master Agreement is a document outlining the terms of an over-the-counter derivatives transaction between two parties. This document serves as a standard agreement in these transactions ...
  2. Trading

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  3. Trading

    Derivatives 101

    A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the asset’s price movement with another party.
  4. Investing

    Find The Right Discount Rate Amid Post-2007 Risks

    OIS discounting has become part of standard valuation techniques, in a market in which there is more uncertainty and less proxies for the risk-free rate.
  5. Managing Wealth

    An In-Depth Look At The Swap Market

    The swap market plays an important role in the global financial marketplace; find out what you need to know about it.
  6. Trading

    Futures, Derivatives and Liquidity: More or Less Risky?

    Futures and derivatives get a bad rap after the 2008 financial crisis, but these instruments are meant to mitigate market risk.
  7. Investing

    Understanding Related-Party Transactions

    In business, a related-party transaction refers to a transaction where parties on both sides have a common interest or relationship.
  8. Investing

    Why Do Some Failed Mergers Result in Break-Up Fees?

    When mergers go bad, there's often a break-up fee involved of as high as 3-5% of the value of the proposed merger.
  9. Trading

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  10. Personal Finance

    Masters Degree Vs. Work Experience: Which One Is More Valuable?

    Some argue that a master's degree only worsens student's financial situations, but future earnings data shows there can be a real financial benefit.
RELATED FAQS
  1. How can an investor terminate a derivative contract?

    Read a brief overview about some of the different ways that derivatives traders can terminate their contracts early, including ... Read Answer >>
  2. How are arm's-length transactions determined by law?

    Determine if transactions are conducted at arm's length by checking if the parties to a contract are independent and transact ... Read Answer >>
  3. Why are OTC (over-the-counter) transactions controversial?

    Learn more about over-the-counter transactions, and why OTC traders are considered riskier than traders working with larger ... Read Answer >>
  4. What is the difference between derivatives and swaps?

    Find out more about derivative securities, swaps, examples of derivatives and swaps, and the main difference between derivative ... Read Answer >>
  5. How are swap agreements financed?

    Learn how swap agreements are now cleared by swap execution facilities and require the use of collateral margin to hold, ... Read Answer >>
  6. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center