Master Trading Agreements Overview

Master Trading Agreements

• Master agreements are faster as they provide standard terms that can be easily adapted.
• They reduce legal risk through enforceability and netting provisions.
• They standardize terms for operational efficiency and system use.
• Agreement updates reflect changes in regulations and market conditions.

Purpose of Master Agreements

• Master agreements define the overall relationship between parties, not specific transactions.
• They cover credit risk mitigation and other non-transaction-specific aspects.
• They use preprinted standard forms, meaning less negotiation is needed.
• Schedules can be used to modify standard provisions, such as scheduling clauses.
• Master agreements are often used to govern relationships regarding credit, tax, and operational matters.
• They create a single net exposure for all transactions under the agreement.
• The terminology conforms to ISDA standards.

ISDA

• ISDA promotes efficient derivative trading practices by developing and maintaining documentation standards.
• They issue standard documentation to facilitate a legal environment for derivatives trading (e.g., Master Agreements and collateral agreements).
• ISDA provides legal opinions on their contracts' enforceability across different legal jurisdictions.
• They educate parties on derivative trading risks and issues.
• ISDA represents the derivatives market by communicating with external parties to improve understanding of the market and promote sound risk management practices.

ISDA Documentation Architecture

• ISDA Master Agreement governs transactions between parties and all confirmations.
• It includes provisions for representations, events of default, and termination.
• Procedures for calculating a single net amount due on early termination are included.
• A schedule is used to adjust standard provisions.
• Confirmations detail the economic terms of each transaction and cite the Master Agreement.
• Collateral documentation details, e.g. credit support annex, and provisions for mark-to-market.
• Definition booklets clarify derivative terms.

Mark-to-Market & Close-Out Netting

• Mark-to-market (MTM) values derivative positions at a certain date.
• Close-out netting calculates a net position across multiple derivatives trades.
• A single net claim can be made instead of individual claims for each trade.

Protocols

• Protocols help implement and adjust agreements.
• They offer assistance with major repapering exercises and bilateral updates.
• Protocols are similar to a membership club, permitting amendatory actions involving multiple parties.

Forms of ISDA Master Agreements

• Various ISDA master agreement forms exist like 1992, 2002, etc.
• Documents cover local currency and cross-border arrangements.

Section 2(a) – General Conditions

• Payments in a master agreement are structured with reference to confirmations.
• Master agreements also include conditions precedent (CP) in case of early termination.
• The conditions precedent are factors that must be met before specific obligations take effect.
• Parties can't claim or engage in further actions relating to payment until conditions are fulfilled.

Confirmations

• The terms binding these transactions are clarified by confirmations.
• A formal confirmation structure must be set up once agreed upon.
• There is a specific procedure when disagreements arise.

Calculation agent

• A calculation agent is a party responsible for determining prices and other relevant factors.
• Procedures are in place in case of disputes between parties over valuations.

Payment Netting

• Payments are netted in various scenarios.
• Parties can use netting to reduce settlement risk and mitigate the impact of tax withholding.
• Bilateral netting is a way for parties in a transaction to reduce the number of payments needed.

Escrow Payments

• Escrow payments are mandatory for some scenarios.
• Specific procedures are needed when simultaneous payments are not possible.

Set-Off

• Set-off is a process where one party can use a cross-claim with another to offset balances.
• It's part of master agreements to allow for offsetting amounts due.