1This Agreement is used to document transactions between parties located in different jurisdictions and/or transactions involving different currencies. This Agreement is used to document transactions between parties located in the same jurisdiction and transactions involving one currency. The Agreement is. Bookstore; Master Agreement; Form of Amendment to ISDA Master Agreement (March ). Bookstore Online Library Free downloads (2). Form of.
|Language:||English, Spanish, Arabic|
|Genre:||Politics & Laws|
|ePub File Size:||24.41 MB|
|PDF File Size:||18.85 MB|
|Distribution:||Free* [*Register to download]|
EX 23 dexhtm ISDA MASTER AGREEMENT of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. ISDA. International Swap Dealers Association, Inc. MASTER AGREEMENT the Definitions; and (v) the preprinted form of ISDA Master Agreement and. Wide Area Information Servers Project Documentation, Scanned and uploaded in
Despite a common perception of derivatives as a new and untested financial product, anecdotes of derivatives transactions date back to ancient Greece, where Aristotle wrote about a philosopher named Thales using derivatives to corner the olive press market and reap a large financial windfall. Derivatives are financial instruments that derive their value from underlying product but do not invlolve the purchase, sale or exchange of that product. For example, a natural gas producer may wish to reduce downward price risk by locking in a minimum price he will receive for his natural gas. One way to accomplish this goal is by the purchase of a financial put option, giving the producer the right to be paid if the price of natural gas falls below the put option strike price. The cost of the derivative would depend in part upon the difference between the minimum price sought and the price for natural gas at the time the derivative was purchased. Derivatives differ from standard commodity transactions in that they usually settle on a financial rather than physical basis.
The User s Guide has a wealth of information but its language can at times be complex and, as it is likely that many of its users may not be legal or tax technicians nor speak English as their first language, I thought it might be useful to provide a section by section interpretation of the ISDA Master Agreement which is clear but not oversimplified.
It is customary to date the Agreement and its Schedule as of the date of the first trade between the parties, even if the Agreement is not signed until some months later. This is based on US practice where the words as of mean with effect from a specified date. This is contrary to best English practice where it is normal to date an agreement on the day it is signed. Under English law you cannot create a contract retrospectively through backdating it.
If you do, you run the high risk of it being considered a forgery. To avoid misleading any court, the preamble to the signing block on page 18 makes it clear that the as of date is merely the effective date.
The signing block records the date upon which the Agreement is actually signed.
The two parties then enter their full legal names and can add details of the jurisdictions where they are incorporated. If cited, this would also be repeated on the first page of the Schedule. Then there is a statement that the parties have entered or propose to enter into Transactions under the Agreement which includes its Schedule used to add to or amend the basic Agreement provisions and which is what negotiators negotiate and any Confirmations exchanged between the parties.
This is the basis for the parties contractual relationship and is important for the single agreement concept as we shall see shortly in Section 1 c. It is made clear that the Agreement can cover transactions entered into before it was executed. Market practice is not to make changes directly on to the pre-printed Agreement text although this was sometimes done in the early days of the market but rather in the Schedule.
This avoids the need to search the preprinted text for changes when reviewing it at a later date. Interpretation a Definitions. The terms defined in Section 14 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement including the Schedule , such Confirmation will prevail for the purpose of the relevant Transaction.
All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties collectively referred to as this Agreement , and the parties would not otherwise enter into any Transactions.
Section 1 b Where there is any inconsistency between the Agreement text and the Schedule, the Schedule will prevail. Where there is a conflict between a Confirmation and the Agreement and its Schedule, the Confirmation will prevail in respect of the relevant Transaction. This gives the Confirmation supremacy in respect of individual deals. Section 1 c The single agreement concept is vitally important and is the basis of close-out netting.
Section 1 c states that all Transactions are entered into relying upon the fact that the Agreement and all Confirmations under it form a single agreement between the parties and they would not have entered into these Transactions otherwise. What this means is that in a close-out situation, the values of all Transactions between the parties are calculated and netted off against each other so as to produce a single figure payable one way or the other.
In an insolvency situation, this prevents a liquidator cherrypicking, i. A liquidator cannot do this if all the Transactions are collapsed into a single payment due to one party or the other.
In other words there is only one cherry.
The single agreement concept reinforces this position. Obligations a General Conditions. Where settlement is by delivery that is, other than by payment , such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement.
Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. Early Termination provisions intervene. The numerous references to delivery in the Agreement cover Transactions which are settled by physical delivery i.
However, the Agreement itself cannot fully document physically settled Transactions, which is why Confirmations for them are very detailed. This is a general statement to the effect that payments and deliveries will be made promptly, in freely transferable funds and in the customary manner in the place of settlement, unless otherwise agreed in a Confirmation or elsewhere in the Agreement. This means that normal payments or deliveries under Section 2 a i will stop if an Event of Default or Potential Event of Default an event which could lead to an Event of Default if it develops occurs to one of the parties or if an Early Termination Date when close-out calculations are made is designated whether for a Termination Event see page 67 for an explanation of this latter term or if any other condition precedent e.
Please note that under 1 , the default could be outside the Agreement, e. Any payments withheld because of the events in section 2 a iii will be treated as Unpaid Amounts under the Section 6 close-out calculations if Market Quotation is chosen as a payment measure see commentary on Section 6, pages 77 9 or one of the components of Loss if that is chosen as the payment measure.
Section 2 b One party to the Agreement may give the other at least five Local Business Days notice of a change in its account for payments or deliveries. The User s Guide clarifies that this notice period is to be calculated in the Local Business Days of the place where the new account is to be located. The other party may object to this there is a reasonableness standard by giving notice to the first party. It might do this if such a change of account is to an overseas Office of the first party and a withholding tax charge might arise.
It might also object to an overseas transfer of account if there was a risk of exchange controls being imposed. If on any date amounts would otherwise be payable:- i in the same currency; and ii in respect of the same Transaction, by each party to the other, then, on such date, each party s obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount.
The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction.
The election may be made in the Schedule or a Confirmation by specifying that subparagraph ii above will not apply to the Transactions identified as being subject to the election, together with the starting date in which case subparagraph ii above will not, or will cease to, apply to such Transactions from such date.
This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries. Payments can be made net if they are in the same currency, for the same Transaction and payable on the same date.
This means that both parties do not have to make payments to each other but the one who owes the most pays the difference between the two amounts to the other party. This avoids the inconvenience of each party making a gross payment to the other and also reduces settlement risk i.
The basic payment netting position is single Transaction netting, i. By making a choice in the Schedule that single Transaction netting will not apply, parties can net payments due under two or more Transactions in the same currency and on the same date both for the same and different products. For multiple Transaction netting they can net different groups of Transactions e.
These arrangements can also be applied to deliveries. The provisions are very flexible, but you should only really agree to what you can actually do operationally or you could incur operational risk. Figure 3. All payments under this Agreement will be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by applicable law, as modified by the practice of any relevant governmental revenue authority, then in effect.
However, X will not be required to pay any additional amount to Y to the extent that it would not be required to be paid but for:- 40 13 Section 2 d i This is a complex clause on withholding tax but it becomes clearer if you see X as the payer and Y as the payee or recipient. Please note that under ISDA, a withholding tax only applies in cross-border transactions.
The ISDA Master Agreement is an international agreement and where cross-border Transactions occur, tax authorities may impose taxes called withholding taxes on payments made under those Transactions.
Where this happens and you were due to receive a payment as payee, you would receive less than you expected.
Section 2 d provides an indemnity that a payer has to increase his payment if a withholding tax is charged so that the payee receives what he expected to receive. Generally speaking, the burden of withholding taxes usually falls on the payer. Withholding taxes can arise in three ways: incorrect initial analysis that no withholding tax applied; a change in Tax Law or similar legal development; a change of facts relating to either the payer or payee which occurs after a Transaction is entered.
This could arise through a change of status or business resulting in the party being no longer eligible for tax treaty benefits.
If a withholding tax is levied because of a change of facts the responsible party will need to pay it or suffer it but will have no right to call a Tax Event Termination Event see commentary on Section 5 b ii. Going through the various points, if a withholding tax is levied on a payer, it must: promptly notify the payee of this; promptly pay the withholding tax calculated or assessed to the tax authorities; promptly send the payee satisfactory documentation evidencing the tax payment to the authorities; and pay the equivalent of the withholding tax together with the net payment to the payee so that it ends up with the amount it originally anticipated.
The ISDA Master Agreement 41 14 Mastering the ISDA Master Agreements and A the failure by Y to comply with or perform any agreement contained in Section 4 a i , 4 a iii or 4 d ; or B the failure of a representation made by Y pursuant to Section 3 f to be accurate and true unless such failure would not have occurred but for I any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into regardless of whether such action is taken or brought with respect to a party to this Agreement or II a Change in Tax Law.
It aims to indemnify a party adversely affected by it, usually a payee. It arises because the payer has decided to do business with a foreign payee. However, A and B in the text opposite provide two exceptions to this.
The payee will not receive a payment grossed up for withholding tax where it has failed to provide any tax documentation necessary to the payer or a Payee Tax Representation it has made has becomes false, unless this has happened because of tax authority or court action or a Change in Tax Law.
Let s take an example to illustrate this. This is because the obligation to indemnify applies to gross payments.
Similar provisions are common in loan agreements where cross-border payments have to be made. If:- 1 X is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, to make any deduction or withholding in respect of which X would not be required to pay an additional amount to Y under Section 2 d i 4 ; 2 X does not so deduct or withhold; and 3 a liability resulting from such Tax is assessed directly against X, then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4 a i , 4 a iii or 4 d.
Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6 c , be required to pay interest before as well as after judgment on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from and including the original due date for payment to but excluding the date of actual payment, at the Default Rate.
Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement.
In these circumstances, the payee will indemnify the payer for that withholding tax, any interest on it or any other penalty for failing to provide the payer with necessary tax documentation so that, inter alia, the payer could avoid the withholding tax or pay it at a reduced rate.
Section 2 e This means that late payments in the normal course will attract interest at the Default Rate i. If an Early Termination Date occurs Section 6 c , interest on overdue amounts will accrue as provided in Section 6 d ii. During ISDA Working Group meetings there was no agreement on how to apply the concept of default interest to physically settled transactions.
Section 2 e provides that compensation for late delivery will be determined as provided in the relevant Confirmation or elsewhere in this Agreement.
Representations Each party represents to the other party which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3 f , at all times until the termination of this Agreement that:- a Basic Representations.
It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing; ii Powers. It has the power to execute this Agreement and any other documentation relating this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance; iii No Violation or Conflict.
Finally, the master agreement greatly aids in risk and credit management for the parties. In its earliest form, it consisted of standard definitions, representations and warranties, events of default, and remedies. The s resulted in major document production by ISDA, including i a revised version of the Swaps Code, known as the ISDA Definitions, drafted and replaced later by the ISDA Definitions; ii a revision to the Master Agreement resulting in the Master Agreement; iii the User's Guide to the Master Agreement, drafted in , explaining in detail each section of the Master Agreement; iv the Commodities Derivatives Definitions, drafted in and supplemented in ; and v the Annex, providing for collateral documentation, finalised in , followed by its User's Guide in The move to update the Agreement had its origins in the succession of crises that affected the global financial markets in the late s.
These events, including the liquidation of Hong Kong broker-dealer Peregrine Investments Holdings and the Russian financial crisis , tested the ISDA documentation to a previously unseen degree. Although the ISDA documentation withstood that test, ISDA decided to establish a strategic review of its documentation to see what lessons could be learned from these events.
This review led, in time, to the full-scale update of Agreement, which culminated in the Agreement. Document architecture[ edit ] The master agreement is the central document around which the rest of the ISDA documentation structure is built. The preprinted master agreement is never altered except to insert the names of the parties, but is customised through use of the schedule to the master agreement, a document containing elections, additions and amendments to the master agreement.
Together with the schedule, the master agreement sets forth all of the general terms and conditions necessary to properly allocate the risks of the transactions between the parties but does not contain any commercial terms specific to a particular transaction. Once the master agreement is executed, the parties can enter into numerous transactions by agreeing to the material commercial terms over the telephone as evidenced by a written confirmation without any need to revisit the underlying terms contained in the master agreement.
There are two versions of the Master Agreement, the local version for transactions between parties located in the same jurisdiction who are transacting in only one currency , and the multicurrency version for use when parties are located in different jurisdictions transacting in different currencies.
The provisions included in the multicurrency version but not in the local currency version concern issues such as taxes , currency of payment, the use of multiple offices to enter into transactions, and the designation of an agent for service of process. The fact that all transactions are the one contract reinforces the ability to close out those transactions and come up with a single net amount payable if a default occurs.
These are events which can lead to termination of transactions before their intended maturity. The Events of Default can be described in summary as events for which a party is at fault , such as a failure to perform under a transaction, breach of a representation or undertaking, and insolvency. The Termination Events are other events which, although no-one is at fault, warrant the early termination of the transactions, such as a change in tax law resulting in taxes being imposed on transactions, illegality, and a merger of a party resulting in a deterioration in its credit quality.
Parties may also elect to specify Additional Termination Events in the Schedule, such as a decline in a corporate party's credit rating or a decline in a hedge fund's Net asset value.
There are two elections that the parties make in the Schedule which affect the operation of these provisions: whether the party not at fault is required to pay if the net termination amount is worked out to be payable to the party at fault. This is a choice of payment method between "First Method" under which the party not at fault does not need to pay and "Second Method" under which the party not at fault is required to pay ; whether the termination values for the transaction will be determined by obtaining quotes from dealers in the market for replacement transactions or by the party not at fault working out how much it has lost or gained as a result of early termination.
This is a choice of payment measure between "Market Quotation" and "Loss". The above only applies in relation to the Master Agreement. The Master Agreement did away with First and Second method. In practice First Method was very rarely opted for because its use required the relevant financial institutions to report their gross, rather than net, exposure under the Master Agreement. This is determined in respect of each Terminated Transaction and is, broadly, the profit or loss which would be made in incurred on entering into an equivalent Transaction as of the Early Termination Date.
This is the net amount payable by one party to the other in respect of the Terminated Transactions. Taxation[ edit ] Section 2 d of the ISDA Master Agreement contains provisions setting out the consequences if a tax is imposed on a payment required to be made by a party under a transaction. Included is a gross-up obligation for certain "Indemnifiable Taxes".
This interlocks with other provisions in the ISDA Master Agreement, such as the taxation representations contained in ss 3 e and 3 f , undertakings in ss 4 a and 4 d , and termination events in ss 5 b ii and 5 b iii.
These provisions are extremely complex and great care is usually taken by negotiators to ensure that the result is not the opposite of what was intended. Multi-branch issues[ edit ] Section 10 of the ISDA Master Agreement addresses issues that arise in connection with counterparties that enter into transactions through more than one office or branch and more than one jurisdiction. Schedule[ edit ] The Schedule and Paragraph 13 are used to make all amendments to and customisations of the Master Agreement and Annex, including the elections of the various options presented to the parties in the Master Agreement and Annex and the addition of provisions not contained in the Master Agreement.
It contains: the elections referred to in the Master Agreement, such as the payment measures and methods, the thresholds relating to certain events of default,and the offices through which parties can act; any amendments that the parties agree to make to the terms of the Master Agreement; and any additional terms that the parties want to include, such as a set-off clause between close-out amounts and amounts owing under other contracts.
The printed form of the Master Agreement is never amended on the face of the document. In negotiations it is not even exchanged, on the presumption that the standard terms will always be used. Credit support documentation[ edit ] There are various standard forms of credit support documentation prepared by ISDA.
The key distinctions between each include their governing law English, New York and Japanese and method of transfer of collateral title transfer and security interest. The English law Credit Support Annexes provide for title transfer collateral, whereas the English law Credit Support Deed provides for a security interest to be granted over transferred collateral.