ISDA Master Agreement

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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.

BREAKING DOWN '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.

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