What Is a Trading Partner Agreement?

A trading partner agreement is an agreement drawn up by two parties that have agreed to trade certain items or information. The agreement outlines the terms of the trade or trading process, including responsibilities, who's involved, how goods or information will be delivered and received, and duties or fees.

Key Takeaways

  • A trading partner agreement governs the exchange for data, information, or items between parties.
  • A trading partner agreement may include the responsibilities of each party, who's involved, how goods or information will be delivered and received, and duties or fees.
  • Trading partner agreements are used in fourth market transactions, as well as to exchange information or goods and services.

Understanding a Trading Partner Agreement

Trading partner agreements are often used in complex financial trade transactions. They may also be used in managing the terms for a variety of business deals, including information releases or distribution of goods.

Trading partner agreements can be developed in various formats and may include a variety of different provisions. They typically require the assistance of legal counsel or an in-house compliance officer. Covenants and provisions included in a trading partner agreement will typically detail the duties and obligations of both parties. Other important information may include a statement of procedure or statement of work outlining certain expectations.

The purpose of the trading partner agreement is to lay out the responsibilities of each party and to help prevent disputes on agreed-upon terms.

Fourth Market Transactions

Trading in the fourth market often warrants the need for trading partner agreements. In the fourth market, institutions trade a variety of different financial instruments which can have complex structuring.

Swaps are one example of a fourth market trading instrument that will require a detailed trading partner agreement. Swaps are a form of derivative contract which allows financial institutions to manage interest rate risk by buying contracts with installment payments based on interest rate differentials.

In a swap contract, a financial institution will trade a variable rate for a fixed rate, or vice versa. A trading partner agreement would detail the terms of the contract including the date of the month when payments are due, the calculations for arriving at the interest rate differentials, and the length of the swap agreement overall.

Business Information

Data providers also often use trading partner agreements to manage the terms of a contract providing for regular distribution of industry data. Credit reporting agencies and health care companies are two types of entities that rely on trading partner agreements for their businesses.

Credit reporting agencies partner with a variety of businesses in the financial industry to send and receive credit reporting information. Trading partner agreements govern the information that is released, the intervals for which the information will flow, and the various technology systems that are used.

In the healthcare industry, a wide range of data is distributed to manage insurance payments and plans. Healthcare providers of all types also partner with various institutions to exchange information that is managed and governed through trading partner agreements.

Goods and Services

Internal and domestic trade partners also regularly use trading partner agreements to manage the exchange of goods and services. These trading partner agreements will specify the terms of delivery, price values, and any tariffs.

Example of a Trading Partner Agreement with Government

Businesses in the healthcare industry use trading partner agreements on a regular basis both for exchanging goods as well as data. Government agencies, such as the health care authorities (HCAs) in different states also have trading partner agreements in place with businesses that will be submitting electronic data to them, regarding Medicaid for example.

In such agreements, the entity submitting the data to the HCA will agree to follow relevant laws and acts, have their own equipment to submit data, ensure confidentiality and security of the data during the exchange, fix errors or deficiencies in the data, maintain a trade log of data, who the data belongs to once exchanged, being audited, and when the contract terminates.

The agreement also points out procedures and reasons the contract can be terminated, that the contract is non-transferable, the order of precedence if there is a legal conflict, whether data needs to be originals or copies, the legal jurisdiction of the contract, as well as other requirements and responsibilities.

Typically such documents are multiple pages and thorough to avoid potential disputes and to safeguard the parties involved. Because of the trading partner agreement, each party interacting with the health care authority knows exactly what they can expect for the HCA, and what the HCA expects from them.