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.

BREAKING DOWN 'ISDA Master Agreement'

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.

ISDA Master 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 ISDA Master 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.

RELATED TERMS
  1. International Swaps and Derivatives ...

    The International Swaps and Derivatives Association (ISDA) is ...
  2. Credit Support Annex

    A credit support annex provides credit protection by setting ...
  3. Termination Clause

    A termination clause is a section of a swap contract that describes ...
  4. Master Trust

    A master trust is an investment vehicle that collectively manages ...
  5. Bilateral Netting

    Bilateral netting is the process of consolidating all swap agreements ...
  6. Formula Method

    The formula method is a technique for calculating termination ...
Related Articles
  1. Investing

    Market Tremors in Credit Default Swaps

    The market for credit default swaps has taken a hit lately.
  2. Trading

    Derivatives 101

    Learn how to use derivatives to hedge, speculate or increase leverage in an investment portfolio.
  3. Personal Finance

    Is a Master's Degree or Experience More Valuable?

    Some argue that a master's degree only worsens a student's financial situation, but future earnings data show there can be a real financial benefit.
  4. Investing

    An introduction to OIS discounting

    Learn how OIS discounting has become part of standard valuation techniques, particularly in an uncertain, post-recession derivatives market.
  5. Trading

    An Overview Of Futures, Derivatives, and Liquidity

    Gain an understanding of futures and derivatives, and how these instruments are meant to mitigate market risk.
  6. Investing

    Is Your Mutual Fund Safe?

    You might be carrying more risk than you think if your fund invests in derivatives.
  7. Personal Finance

    4 Derivative Sales Career Paths

    Discover some sell-side career paths of derivatives markets that offer some unique opportunities for career seekers in this article.
  8. Trading

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  9. Trading

    Introduction To Counterparty Risk

    Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk.
  10. Trading

    Different Types of Swaps

    Identify and explore the most common types of swap contracts. Swaps are derivative instruments that represent an agreement between two parties to exchange a series of cash flows over a specific ...
RELATED FAQS
  1. What is the difference between derivatives and swaps?

    Swaps comprise just one type of the broader asset class called derivatives. Read Answer >>
  2. What is the difference between derivatives and options?

    A derivative is a financial contract that gets its value from an underlying asset. Options offer one type of common derivative. Read Answer >>
  3. How do currency swaps work?

    Learn how a currency swap works, including who uses these transactions, and the mechanics and purpose of the different cash ... Read Answer >>
  4. What Is the Difference Between Payment Netting and Close-Out Netting?

    Both payment netting and close-out netting are methods of settlement between two or more parties, used to reduce risk exposure. Read Answer >>
Trading Center