ISDA Documentation Architecture 2

At the center of the ISDA documentation architecture is the Master Agreement. The Master Agreement began life in 1985 as the Code of Standard Wording, Assumptions and Provisions for Swaps (it spells SWAPS - how cute is that?) and matured into its present acronym-free iteration as the 1993 ISDA Master Agreement.

The Master Agreement is made up of three discrete pieces - the printed form, the schedule, and any subsequent confirmations. The printed form and the schedule lay out the mechanics of the transaction. The printed form is a standard recitation of parties, addresses and other routine information - it is not generally amended. The schedule is a mechanism for customizing the printed form. It gives the parties the option of adding customized langauge and turning on or off some of the printed form's provisions.

The confirmation is a standard practice that predates the Master Agreement. The Master Agreement sets out general operating principles for a proposed derivatives transactions, but the transactions don't actually occur until a confirmation is sent. The confirmation contains the specific monetary terms of the transaction.

The 1993 Master Agreement provides two methods for determining payment in the event of default. Parties must choose one. During the Japanese banking crisis in the 1990's both mechanisms failed to provide equitable settlements. As a result, the ISDA revised the Master Agreement to provide a broader settlement mechanism. The new mechanism is the primary difference between the 1993 Master Agreement and the 2002 Master Agreement.

For a very thorough discussion of both Master Agreements, see 1397 PLI/Corp 51, Klein, Overview of the ISDA Master Agreement Forms.

Part 3: LEHMAN
Part 1