What Is an ISDA Master Agreement?

An ISDA Master Agreement is the standard document that is regularly used to govern over-the-counter derivatives transactions. The Agreement, which is published by the International Swaps and Derivatives Association (ISDA), outlines the terms to be applied to a derivatives transaction between two parties, typically a derivatives dealer and a counterparty. The Master Agreement itself is standard, but it is accompanied by a customized schedule and sometimes a credit support annex, both of which are signed by the two parties in a given transaction.


ISDA Master Agreement

How the Agreement Works

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 in daily trades, prompted the creation of the ISDA Master Agreement in 1985. It was subject to updates and revisions in 1992 and again in 2002, both of which are currently available for use. 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.

Agreement Documentation

Most multinational banks have ISDAs 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 allows the two parties involved to mitigate their credit risk by stipulating the terms and conditions under which they're 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 of the Agreement

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.