The mastery agreement is the central document around which the rest of the ISDA documentation structure is cultivated. The pre-printed framework contract is never amended, with the exception of the addition of the names of the parties, but is adapted to the master agreement by the use of the calendar, a document containing options, additions and changes to the framework contract. An ISDA master contract is the standard document that is regularly used to regulate over-the-counter derivatives transactions. The agreement, published by the International Swaps and Derivatives Association (ISDA), outlines the conditions to be applied to a derivatives transaction between two parties, usually to a derivatives trader and counterparty. The master contract of the ISDA itself is the norm, but it is accompanied by a bespoke timetable and sometimes an annex to support the credit, both signed by both parties in a given transaction. The framework contract allows the parties to calculate their net financial commitment in over-the-counter transactions, i.e. a party calculates the difference between what it owes to a counterparty under a master contract and what the consideration owes under the same agreement. ISDA is responsible for the development and maintenance of the ISDA lead contract, which serves as a model for discussions between a trader and the counterparty who wish to enter into a derivatives transaction. The MASTERagrement ISDA was first published in 1992 and updated in 2002. The ISDA Masteragrement gives an overview of all trading areas in a typical transaction. These include late payment events and termination events, such as the contract being entered into when an event occurs, and even how the tax consequences are handled. In 1987, ISDA established three documents: (i) a standard form control agreement for U.S.
dollar interest rate swaps; (ii) a standard-master contract for multi-currency interest rate and exchange rate swaps (known as the “1987 ISDA Executive Contract”); and (iii) definitions of interest rates and currencies. “All transactions are concluded on the basis that this master contract and all confirmations form a single agreement between the parties … and the parties would not make transactions otherwise. Over-the-counter derivatives are traded between two parties, not through an exchange or intermediary. The size of the over-the-counter market means that risk managers must carefully review traders and ensure that authorized transactions are properly managed. When two parties complete a transaction, they will each receive confirmation explaining their details and referring to the signed agreement. The terms of the ISDA master contract then cover the transaction. The framework contract is quite long and the negotiation process can be difficult, but once a framework contract is signed, the documentation of future transactions between parties will be reduced to a brief confirmation of the essential terms of the transaction. The master`s agreement was updated in 2002 (known as ISDA Masteragrement 2002). The updated phase of the 1992 agreement has its roots in the succession of crises that affected global financial markets in the late 1990s.
These events, including the liquidation of Hong Kong broker Peregrine Investments Holdings Holdings and the 1998 Russian financial crisis, tested ISDA documentation to an extent unknown to date. Although the ISDA documentation withstood this test, ISDA decided to put in place a strategic review of its documentation to see what lessons could be learned from these events. This revision resulted in a complete update to the 1992 agreement, which culminated in the 2002 agreement. In addition to the standard master text, there is a calendar that allows parties to add or change standard conditions. The timetable is what the negotiators negotiate.