What Is an International Foreign Exchange Master Agreement?

An International Foreign Exchange Master Agreement (IFEMA) is a master agreement between two parties for both spot and forward transactions in the exchange of currency in the foreign exchange (Forex) market. A master agreement is a standardized agreement between two parties that sets out standard terms applying to all such transactions between the parties. The IFEMA agreement covers all facets of such forex transactions, providing detailed practices for creation of and settlement for a Forex contract. In addition to the contract terms, IFEMA explains the consequences of default, force majeure or other unforeseen circumstances.

Understanding IFEMA

The International Foreign Exchange Master Agreement (IFEMA) agreement was published in 1997. It was originally developed by the British Bankers' Association and the Foreign Exchange Committee (an advisory committee sponsored by the Federal Reserve Bank of New York, but independent of it). IFEMA was published in 1997 by these two groups in conjunction with the Canadian Foreign Exchange Committee and the Tokyo Foreign Exchange Market Practices Committee.

The parties drawing up the IFEMA recognized that market practices evolve, and IFEMA is intended to represent the best market practice at the time. IFEMA was intended primarily for interdealer trades (that is, where both counterparties to the contract are dealers), but it can be used by non-dealer counterparties if both agree. IFEMA has been designed so that additional warranties, covenants, etc. that may be needed for such transactions can easily be added in.

Other Master Agreements

At the same time as IFEMA was developed for foreign exchange transactions, other master agreements were developed by the same groupings for different types of transactions, namely ICOM, for International Currency Market Options, and FEOMA, the Foreign Exchange and Options Master Agreement which essentially combines the IFEMA and ICOM agreements and covers spot and forward foreign exchange transactions and currency options. This grouping of foreign exchange agreements was later supplemented by the International Foreign Exchange and Currency Option Master Agreement (IFXCO) in 2005 (again, authored by the same four groupings).

Surveys undertaken at the time that IFXCO was drawn up found that although there had been some significant changes in the Forex market since 1997, and despite many new contracts being made using an updated ISDA master agreement (from 2002), there were also many participants still using the IFEMA (and FEOMA) agreements. This was generally either because they had been executed some time previously and had not been replaced, or because counterparties (by then including many non-dealers, such as hedge funds) only intended to deal in foreign exchange and/or currency option trades and preferred IFEMA and FEOMA because they are simpler agreements.