An ISDA Agreement is the most commonly used master contract for over the counter derivative transactions internationally. It has been published by the International Swaps and Derivatives Association. It constitutes the framework within which the documentation of over the counter derivatives may take place. It governs all the transactions that take place, in the present or in the future between the parties. The terms need not be changed, every time a transaction is entered into. Any customizations to suit specific transactions are typically included in schedules to the ISDA contract. An ISDA master agreement template is aimed at risk mitigation. Commercial terms which govern a particular transaction are included in the schedules appended thereto.
Purpose of an ISDA Agreement?
An ISDA Master Agreement sample, typically, serves the purpose of acting as a broad framework within which over the counter derivative transactions may function. It prevents the need for re-negotiating all the terms and leaves the parties time to concentrate only on core commercial terms and conditions. It creates standard documentation and mitigates risk. Being published by an international organization, it has the relevant authority, hence is widely accepted.
Inclusion in an ISDA Agreement
A typical ISDA Master Agreement sample, contains the standard master agreement (as published by the International Swaps and Derivative Association), the schedules which will explain the commercial terms of specific transactions, the confirmation which sets out the financial and economic terms of the transaction and standard boilerplate clauses such as waiver, remedies, notices and dispute resolution.
Key Terms in an ISDA Agreement
The following terms need to be included in an ISDA agreement:
- Obligations: Obligations pertaining to payment, the payment process and timeline, termination, default events etc. need to be included in the agreement. Typically, condition precedents are attached to obligations in an ISDA agreement.
- Payment Netting: This clause allows the netting or adjusting of payment against each party’s payment obligations to the other. For instance, if both the parties owe each other money in the same currency and with respect to the same transaction, then the debt shall be considered to be discharged.
- Representations: Representations such as compliance with laws, valid legal existence, no litigation etc. need to be given in the agreement.
- Events of Default: An ISDA master agreement needs to include certain events which shall be characterized as events of default and which would trigger fault-based termination.
Drafting of an ISDA Agreement
The following guidelines need to be followed for effective drafting of an ISDA agreement:
- Make sure to add the events of default mentioned in the ISDA master agreement template. There are eight standard events of default mentioned therein. Apart from these, additional events of defaults can also be added to the list.
- Termination events: Events which allow a no-fault based termination should also be included in the contract.
- Options other than termination of the contract, such as suspension of performance should also be provided to the parties.
- Typically, a grace period or a cure period should be built in.
- Payment netting clause should be drafted carefully, as it can be technical and complex.
Types of ISDA Agreement
There are two versions of the ISDA Agreement. One is the 2002 ISDA master agreement and the other is the 1992 ISDA Master agreement. Both the versions split the ISDA master agreement into 14 Sections which lay down the contractual relationship between the parties. It includes standard terms which detail what happens if a default occurs to one of the parties.
Advantages of ISDA Agreement
The following are the advantages of having an ISDA Agreement:
- Saves time on negotiation by having a basic framework of terms and conditions in place.
- The complex nature of a derivative transaction requires such an outline, as it saves costs on hiring lawyers to draft such complex terms.
- Extensive definition of complex terms, a thorough outline of obligations prevents the arising of any disputes.
- The ISDA master agreement helps in interpretation of the terms of the contract.
- It also helps in mitigating the risk involved.
Cons of ISDA Agreement
Cons of ISDA Agreement are:
- Lack of flexibility.
- May end up disregarding the consent of the parties as the fixed terms cannot be negotiated.
- Not dynamic.
Sample ISDA Master Agreement
An ISDA Agreement serves an important purpose, by acting like a concrete framework of terms and conditions within which derivative contracts can exist. Any disputes arising should preferably be settled by arbitration.
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