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. 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 isda masteragrement is a framework agreement that defines the terms and conditions between parties wishing to trade over-the-counter derivatives. There are two main versions that are still widely used on the market: the 1992 ISDA Master Agreement (Multicurrency – Cross Border) and the 2002 ISDA Master Agreement. 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. Most multinational banks have ISDA master agreements. These agreements generally apply to all branches engaged in currency, interest rate or option trading.
Banks require counterparties to sign an exchange agreement. Some also require exchange agreements. While the ISDA master contract is the norm, some of its terms and conditions are changed and defined in the accompanying schedule. The schedule is negotiated, either to cover (a) the requirements of a given hedging transaction or (b) a current business relationship. As Briggs J. noted, the agreement is “probably the most important standard market agreement used in the financial world.” The decision could therefore have significant consequences for all companies that need derivatives to manage the risks arising from their financial obligations. The framework contract also helps to reduce litigation by providing significant resources that define its contractual terms and explain the intent of the contract, thus preventing litigation from beginning and providing a neutral resource for interpreting standard contractual terms.