What Is the International Swaps and Derivatives Association?

The International Swaps and Derivatives Association (ISDA) is a trade organization created by the private negotiated derivatives market that represents participating parties. This association helps to improve the private negotiated derivatives market by identifying and reducing risks in the market. For nearly three decades the industry has used the ISDA master agreement as a template for entering into contractual obligation for derivatives, creating a basic structure and standardization where there were only bespoke transactions before.

Key Takeaways

  • The International Swaps and Derivatives Association is a professional association that has been operating since 1985 to promote and improve the trading of swaps and derivatives.
  • The ISDA developed a standardized agreement to serve as a template for swaps traders.
  • The ISDA sees it mission as reducing counterparty risk, increasing transparency and improving infrastructure.

Understanding the ISDA

The International Swaps and Derivatives Association was created to make the world of privately negotiated derivatives safer and more efficient. The ISDA fulfills this role by providing templates for counterparties in derivatives contracts to use in negotiation and by providing a platform for the institutions that deal in the market to network and raise common concerns and issues. The ISDA identifies its three key work areas as:

  1. Reducing counterparty credit risk
  2. Increasing transparency
  3. Improving the operational infrastructure of the derivatives industry

The ISDA was created due to the challenges the growing derivatives market posed for financial institutions. The demand for derivatives grew with the increasingly global nature of finance, but a lack of clarity on what the parties in a derivatives transaction were risking and receiving hurt the industry. The ISDA was created to help demystify the derivatives market, thereby enabling further growth.

The Reach of the International Swaps and Derivatives Association

Created in 1985, the ISDA has members from institutions around the world. In 2018, the ISDA boasted 875 member institutions spread over 68 countries. These member institutions include participants in all levels of the derivatives market, spanning everyone from commodity companies, law firms, and investment managers to international banks, derivatives exchanges and clearing houses.


ISDA Master Agreement

The International Swaps and Derivatives Association and the ISDA Master Agreement

The ISDA is responsible for creating and maintaining the ISDA Master Agreement that is used as a template for discussions between a dealer and the counterparty looking to enter a derivatives transaction. The ISDA Master Agreement was first published in 1992 and was updated in 2002. The ISDA Master Agreement provides an outline of all the areas for negotiation in a typical transaction. This includes events of default and termination events, how the agreement will be closed out if an event occurs, and even how tax consequences will be dealt with.

The ISDA Master Agreement is also supported by a variety of materials that establish the definitions for the terms in the contract and user guides for counterparties and dealers. Beyond the ISDA Master Agreement, the ISDA is a source for new industry tools, information on best practices and a general resource for all things derivatives.