Commentary ISDA Master Agreements

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  1 Commentary on the ISDA Master Agreements February 2008  2 Commentary on the ISDA Master Agreements Contents General ISDA Documentation Master Agreements Schedule Confirmations and Definitions Collateral agreements Termination and close-out netting Commentary on Printed Terms Preamble Section 1 - Interpretation Section 2 - Obligations Section 3 - Representations Section 4 - Agreements Section 5 - Events of Default and Termination Events Section 6 - Early Termination Section 7 - Transfer Section 8 - Contractual currency Section 9 - Miscellaneous Section 10 - Offices, Multibranch parties Section 11 - Expenses Section 12 - Notices Section 13 - Governing law and jurisdiction Section 14 - Definitions Signatures Commentary on the Schedule Part 1 - Termination provisions Part 2 - Tax representations Part 3 - Agreement to deliver documents Part 4 - Miscellaneous Part 5 - Other provisions  Amendments to the Master Agreement General ISDA Amendments Other common amendments  Annex 1 Contents Page 3 Page 3 Page 3 Page 4 Page 4 Page 4 Page 5 Page 6 Page 6 Page 6 Page 7 Page 7 Page 8 Page 9 Page 11 Page 13 Page 13 Page 14 Page 14 Page 14 Page 14 Page 14 Page 15 Page 15 Page 15 Page 15 Page 16 Page 17 Page 17 Page 18 Page 18 Page 18 Page 18 Page 20 Page 21  3 The Local Currency - Single Jurisdiction version is intended for transactions involving parties in the same  jurisdiction and a single currency. It is of rather limited use, in that even if parties within a single jurisdiction enter into single currency transactions in the first instance, they may later decide to widen the scope of their transactions and find the agreement inappropriate. The Multicurrency - Cross Border version is the most versatile, and - although it can, of course, be used between parties in the same jurisdiction for transactions involving a single currency - has been particularly designed to cater for transactions which are entered into between parties in different jurisdictions and/or which involve more than one currency. It is this agreement which is most commonly used and on which this memorandum concentrates. The 2002 Agreement The 2002 Agreement updates the 1992 Agreement and includes certain new provisions. The 2002 Agreement, as with the 1992 Agreement, caters for transactions entered into between parties in different jurisdictions and/or which involve more than one currency. In brief the key changes which have been made are: a. providing for Force Majeure as a new Termination Event; b. providing a new methodology for close-out calculations; c. reducing the grace period for the Failure to Pay or Deliver Event of Default from 3 to 1 Local Business Days; General ISDA Documentation ISDA has developed standard terms on which parties can document a wide range of over-the-counter (OTC) derivatives transactions. The Master Agreements may be used to document a wide range of derivative transactions. A list of transactions commonly documented under them are set out in Annex 1. Master Agreements The Master Agreements are designed, amongst other things, to facilitate cross-transaction payment and close-out netting and provide standardisation of terms which are no-transaction specific. They each contain certain fundamental standard terms which provide transaction linkage together with a menu of standard terms which parties can select or disapply certain matters such as payment netting, events of default and other events entitling a party to call for early termination and to specify details for matter such as transfers and notices. The 1992 Agreement   At the core of the ISDA documentation framework is the 1992 Agreement. There is also a Local Currency – Single Jurisdiction version of the 1992 ISDA Master Agreement Commentary on the ISDA Master Agreements This memorandum is intended as an introduction to the 1992 (Multicurrency-Cross Border) Master Agreement (the “1992 Agreement”) and the ISDA 2002 Master Agreement (the “2002 Agreement” and, together with the 1992  Agreement, the “Master Agreements”). The Master Agreements are published by the International Swaps & Derivatives Association, Inc. (“ISDA”). This document is not intended as a comprehensive review nor as a recommendation that a particular type of agreement is or is not suitable for particular transactions. The commentary is based on the 1992 Agreement and where applicable, key differences in the 2002 Agreement are referenced. Detailed commentaries on the Master  Agreements can be found in the User’s Guides to the 1992 Agreement and 2002 Agreement published by ISDA. Defined terms have the meaning given to them in the Master Agreements. If you require further advice, please see the contact details on the back of this paper.  4 d. some hardening of the Bankruptcy Event of Default; e. expansion of Breach of Agreement Event of Default to include repudiation; f. expanding the definition of Specified Transaction for the purposes of the Default under Specified Transaction Event of Default to include, amongst other things, stock lending and repo; g. combining the two limbs in the Cross Default Event of Default in determining whether the Threshold has been reached; h. including, as standard, a set-off provision (see Section 6(f)); i. providing revised and consolidated interest and compensation provisions (see Section 9). The list above is illustrative of several of the key changes to the 1992 Agreement, and is not exhaustive nor is it intended to be a legal analysis of the documents. As well as these new provisions, various provisions have also been amended. ISDA have produced a blacklined version of the 2002 Agreement which shows the changes from the 1992  Agreement. Whilst the 1992 Agreement is still being used predominantly in the market-place, the 2002 Agreement is increasingly being used, particularly in the end user side of the market and users should familiarise themselves with the new terms. Schedule The Master Agreements are standard printed forms and do not of themselves constitute workable agreements. Many of the provisions are optional and need to be selected by the parties in order to apply. To do this it is necessary to complete a “Schedule” tailoring the agreement to the particular parties. Within the body of the Schedule the parties can alter or amend the provisions of the printed form as they wish, both by selecting between alternative provisions (for example, on the method of calculating close-out payments or the applicable governing law) and by adding provisions of their own (or, indeed, disapplying any of the standard provisions). The Schedule can be completed as it stands. However, it is customary - and generally more convenient - for the Schedule to be retyped. This is perfectly unobjectionable. It is, however, strongly recommended that the main body of each of the Master Agreements - i.e. the standard terms preceding the Schedule - is never retyped or altered. The advantage of standardisation is lost if it is not clear whether provisions of the standard forms have been changed. Confirmations and Definitions  A Master Agreement and Schedule together provide a framework for derivatives transactions between two parties. They do not, however, set out the terms (in particular the financial/pricing terms) of individual deals. For this, the parties need to exchange a Confirmation setting out the particular commercial terms. ISDA has produced a number of different forms of pro forma Confirmation suited to different types of transactions, and a number of definitional booklets providing standard terms for inclusion in such confirmations and establishing the basis for such matters as rate fixing, calculations and so on. Collateral agreements The intrinsic value of swap transactions may vary from day to day as the markets fluctuate. It is increasingly common for parties to mark transactions to market on a regular basis and to seek to collateralise if their exposure passes certain thresholds. There are a number of reasons for this. In particular, a party may be motivated by a concern to maximise lines of credit from new or existing counterparties, to reduce credit risk, to reduce capital maintenance requirements or to meet regulatory concerns (institutions regulated by the Financial Services Authority (FSA), for example, are required by the FSA Rules to mark transactions to market daily). There are a number of ways in which this can be done, and in an attempt to introduce market standardisation ISDA have produced four agreements intended to assist with the establishment of bilateral mark-to-market security arrangements. These are:  The  1994 Credit Support Annex (Security Interest  – New York Law), which has an accompanying User’s Guide. It is governed by, and is intended for use with, agreements subject to New York law and takes the form of an annex which, when adopted, forms part of the master agreement itself. It requires cash and/or securities to be pledged by one party to the other if the amount of exposure requires this, and operates by creating a security interest. Commentary on the ISDA Master Agreements
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