ISDA Master Agreement

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.

RELATED TERMS
  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Interest-Rate Derivative

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

    Over-The-Counter (or OTC) is a security traded in some context ...
  4. Equity Derivative

    A derivative instrument with underlying assets based on equity ...
  5. International Swaps and Derivatives ...

    An association created by the private negotiated derivatives ...
  6. Price Swap Derivative

    A derivative transaction in which one party guarantees a fixed ...
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.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  4. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  5. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  6. Can hedge funds outperform the market?

    Generating returns that exceed those provided by the broader market is the goal of nearly every investor. However, the methods ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center