ISDA Master Agreements PDF

WHY USE MASTER TRADING AGREEMENTS? Faster – standard terms (which can be amended for particular scenarios with ease) Reduce legal risk – enforceability, close-out netting Standardized terms assists with operations / use of systems Updates from trade associations re: regulatory, market chang...

WHY USE MASTER TRADING AGREEMENTS? Faster – standard terms (which can be amended for particular scenarios with ease) Reduce legal risk – enforceability, close-out netting Standardized terms assists with operations / use of systems Updates from trade associations re: regulatory, market changes etc. Purpose of a Master Agreement Set out the provisions governing the parties relationship which are non transaction specific (including with respect to credit risk mitigation) Preprinted standard forms – meant to be relatively uncontroversial so require little negotiation *Schedule (para 11/13 in case of a CSA/CSD) to tweak as needed. Certain provisions in the preprint only become operative if elected in the Schedule (para 11/13 of CSD) Ability to add in bespoke provisions Often said to focus on relationship (credit/tax/operational) matters Single agreement concept – objective – create a single net exposure * ISDA terminology / numbering 2024 D2 Legal Technology Ltd CONFIDENTIAL 1 WHO ARE ISDA? International Swap and Derivatives Association – Promotes practices conducive to the efficient conduct of the business, including the development and maintenance of derivatives documentation. Issues standard documentation for facilitating a legal environment in which derivatives can be traded i.e. Master Agreements and Collateral Agreements – Obtains legal opinions on the enforceability of ISDA contracts in different legal jurisdictions and educates all parties on the various issues and aspects of derivatives – Represents the derivatives market with external parties and advances public understanding of the derivatives business – Promotes the development of sound risk management practices Other Key Trade Associations 2024 D2 Legal Technology Ltd CONFIDENTIAL 2 THE ISDA DOCUMENTATION ARCHITECTURE (1/3) Collateral Documentation (e.g. ISDA Master Agreement the Credit Support Annex) One agreement to govern all Transactions between the parties Parties establish bilateral mark to market arrangements The Master Agreement and all confirmations form a SINGLE AGREEMENT between the parties Forms part of ISDA Master Agreement Includes representations, undertakings, events of default and termination events covering all Transactions Other Credit Support Sets out procedures for calculating a single net amount due on an early Parent company guarantee termination for all terminated Transactions Other security Schedule is used to make changes to standard provisions Definition Booklets 2021/2006 Definitions provide basic framework for documentation of derivative Confirmations transactions. It is more than One for each Transaction just definitions – it contains substantive terms Incorporates relevant definitions Deals with matters like payment Forms part of and is made subject to the Master Agreement calculations, reference rates, Sets out the economic terms of a Transaction payment mechanics Depending on types of product (e.g. equity swaps or credit default swaps), specific product definitions may also be necessary (e.g. for Credit Derivatives, Commodity Derivatives) 2024 D2 Legal Technology Ltd CONFIDENTIAL 3 THE ISDA DOCUMENTATION ARCHITECTURE (2/3) THE ISDA FRAMEWORK Bridges Annexes  North American Power  2002 Energy Agreement Credit Support Annex Bridge Documents  2001 Margin Supplement  North American Gas  2001 Cross-Agreement Annex Bridge (incorporating 2001 Margin Provisions)  GTMA Annex (UK Power)  1996 FRABBA Bridge  1995 Credit Support  European Gas Annex  1996 BBAIRS Bridge Annex (Transfer-English  Global Physical Coal law) Annex  1994 Credit Support Definitions Annex (New York law) 1992/2002  Equity Definitions 1995 Credit Support Deed (Security Interest-English Master  2006/2021 Definitions  Fund Definitions law) Agreement  Inflation Definitions  Commodity Definitions 1995/2011 Credit Support Confirmations  Long form  Credit Definitions Annex (Japanese law) confirmations  Digital Assets Definitions  FX and Currency Option Confirmations Definitions  Short form  Government Bond Option 2002 Master Agreement Definitions confirmations Protocol  Master confirmation agreements 2024 D2 Legal Technology Ltd CONFIDENTIAL 4 THE ISDA DOCUMENTATION ARCHITECTURE (3/3) 2024 D2 Legal Technology Ltd CONFIDENTIAL 5 MARK TO MARKET & CLOSE-OUT NETTING Interest Rate Swap example Fixed rate payer: XYZ Corp Fixed rate: 5 percent Floating rate payer: WFS Floating rate: USD Libor Notional amount: US$ 100 million Maturity: 5 years Fixed rate: 5% XYZ Corp $100,000 WFS Floating rate: USD Libor - What is the mark to market on day 0? - What is the mark to market two years later? 2024 D2 Legal Technology Ltd CONFIDENTIAL 6 MARK TO MARKET & CLOSE-OUT NETTING So take for example, WFS’s trading relationship with XYZ Corp. There may be a number of derivative trades, each of them has a certain Mark-to-Market. Some may be positive (are in the money – WFS would need to pay a third party to replace XYZ Corp on the other side) Some may be negative (are out of the money – a third party would pay WFS to replace XYZ Corp on the other side) If WFS Corp is not performing, there are two contrasting situations: Make a single net claim for the value of the whole portfolio of trades XYZ Corp OR (A) Pay them the value of each transaction where we owe them money (B) Make a claim for each transaction with credit exposure 2024 D2 Legal Technology Ltd CONFIDENTIAL 7 MARK TO MARKET & CLOSE-OUT NETTING MTM = +£200m WFS XYZ Corp Transaction 1 MTM viewed from a WFS MTM = +£200m WFS XYZ Corp perspective. Transaction 2 So Txn 1 is for example “in the money” for WFS. MTM = -£500m WFS XYZ Corp Transaction 3 XYZ Corp has a £100m credit exposure to WFS. WFS does not have credit exposure to XYZ Corp 2024 D2 Legal Technology Ltd CONFIDENTIAL 8 MARK TO MARKET & CLOSE-OUT NETTING MTM = +£200m WFS XYZ Corp Transaction 1 MTM = +£200m WFS XYZ Corp Transaction 2 MTM = -£500m WFS XYZ Corp Transaction 3 WFS has a £400m credit exposure to XYZ Corp 2024 D2 Legal Technology Ltd CONFIDENTIAL 9 MARK TO MARKET & CLOSE-OUT NETTING +£200m +£200m WFS XYZ Corp -£500m Legal Glued together by the ISDA Master Agreement Glue -£100m WFS XYZ Corp 2024 D2 Legal Technology Ltd CONFIDENTIAL 10 LONG FORM CONFIRMATIONS 2024 D2 Legal Technology Ltd CONFIDENTIAL 11 LONG FORM CONFIRMATIONS – WHAT IS MISSING? (1/2) 2024 D2 Legal Technology Ltd CONFIDENTIAL 12 LONG FORM CONFIRMATIONS – WHAT IS MISSING? (2/2) 2024 D2 Legal Technology Ltd CONFIDENTIAL 13 THE THREE PILLARS Single Flawed Asset Close-Out Agreement & Conditionality Netting 2024 D2 Legal Technology Ltd CONFIDENTIAL 14 PROTOCOLS Assist with major repapering exercises Unilateral adherence – allows multiple bilateral updates e.g. for introduction of EURO, INITIAL USE LIBOR cessation Akin to membership of a club, agreeing to bilaterally amend CURRENT Lack of awareness of resultant terms, especially where commercial impact (or key terms in POSITION respect of an urgent event) 2024 D2 Legal Technology Ltd CONFIDENTIAL 15 FORMS OF ISDA MASTER AGREEMENT 2024 D2 Legal Technology Ltd CONFIDENTIAL 16 2002 ISDA MASTER AGREEMENT – THE PREPRINT THE PREPRINT Section 1 – Interpretation Section 2 - Obligations (includes payment netting; gross-up) Sunny-side Section 3 – Representations Section 4 - Agreements (covenants/undertakings) Section 5 - Events of Default and Termination Events Dark-side Section 6 - Early Termination (termination of transactions; close-out netting) Section 7 – Transfer Section 8 - Contractual Currency (currency indemnity) Section 9 - Miscellaneous (partly boilerplate) Section 10 - Offices; Multibranch Parties Back-side Section 11 – Expenses Section 12 – Notices Section 13 - Governing Law and Jurisdiction Section 14 - Definitions 2024 D2 Legal Technology Ltd CONFIDENTIAL 17  SECTION 2 - SECTION 2(A) – GENERAL CONDITIONS OBLIGATIONS Section 2(a)(i) and (ii) – set out payment and delivery obligations by reference to Confirmations. Section 2(a)(iii) – conditions precedent (CP) to performance of scheduled payments and deliveries in 1992 and 2002 Master Agreements: ‒ No Early Termination Date in respect of relevant Transaction (belt and braces) ‒ No Event of Default has occurred and is continuing ‒ No Potential Event of Default has occurred and is continuing ‒ No failure of any other applicable condition precedent (placeholder) The obligations in Section 2(a)(i) do not arise as long as the CP is unfulfilled: ‒ Purpose - to protect a party from incurring additional exposure to a party on the cusp of default: Potential Event of Default: no right to designate ETD so without s.2(a)(iii) potentially increasing exposure as one waits for default Event of Default: right to designate ETD but it may not be commercially sensible to do so (cost to non-defaulting parties, may be disruptive to the market generally, potential for remedy) 2024 D2 Legal Technology Ltd CONFIDENTIAL 18  SECTION 9 - 9(E) CONFIRMATIONS CONFIRMATIONS 9(e)(ii) Confirmations: The parties will be bound by the terms of each Transaction from the moment they agree to those terms. They must agree a confirmation (which they will designate as a Confirmation) as soon as practicable. The Confirmation will be evidence of a binding supplement to this Agreement. 5(j) WFS Bespoke Provision - Procedures for Entering Transactions On or promptly following the Trade Date of a Transaction, Party A will send to Party B a Confirmation. Party B will promptly thereafter confirm the accuracy of such Confirmation. If any dispute arises, the parties shall in good faith make reasonable efforts to resolve the dispute. Negative Affirmation – if Party B fails to accept or dispute the Confirmation within two Local Business Days after it was effectively sent to Party B, the Confirmation shall be deemed to correctly reflect the parties’ agreement on the terms of the Transaction, absent manifest error. 2024 D2 Legal Technology Ltd CONFIDENTIAL 19  SECTION 4 - SECTION 4 - AGREEMENTS AGREEMENTS Section 4(a) – Furnish Specified Information – the obligation to deliver documents required or specified in the Schedule. Section 4(b) – Maintain Authorizations – obligation to use "reasonable efforts" to maintain authorizations required by this Agreement. Section 4(c) – Comply with Laws – obligation to comply with the law, where failure so to comply would materially impair its ability to perform. 2024 D2 Legal Technology Ltd CONFIDENTIAL 20 SECTION 13 – GOVERNING LAW AND JURISDICTION SECTION 13 – APPLICABLE LAW Governing Law – English or New York Jurisdiction – exclusive or non-exclusive jurisdiction Process Agent – requirements to serve process ISDA 2002 Master Agreement Pre-Print 2018 ISDA Model Jurisdiction Clauses 13 (b) Jurisdiction. With respect to any suit, 13 (b) Jurisdiction. With respect to any dispute, action or proceedings relating to any dispute claim, difference or controversy arising out of, arising out of or in connection with this relating to or having any connection with this Agreement (“Proceedings”), each party Agreement, including any dispute as to its irrevocably:— existence, validity, interpretation, performance, breach or termination or the consequences of its nullity and any dispute relating to any non- contractual obligations arising out of or in connection with it (“Proceedings”), each party irrevocably:- 2024 D2 Legal Technology Ltd CONFIDENTIAL 21  PART 1 TERMINATION CURRENCY ELECTIONS The Termination Currency is the currency in which the payment due upon an early termination is paid in. It does not affect the payment currency of transactions under the ISDA. Version 1: Part 1 (f) “Termination Currency” means the currency selected by the party which is not the Defaulting Party or Affected Party, as the case may be, or when there are two Affected Parties, the currency agreed by Party A and Party B. However, the Termination Currency shall be one of the currencies in which payments were to be made in respect of any Terminated Transaction, provided that a Non- defaulting Party may also select the currency of the country in which the Defaulting Party is organized. If the currency selected is not freely available, or when there are two Affected Parties and they cannot agree on a Termination Currency, the Termination Currency shall be United States Dollars. Version 2: Part 1 (f) “Termination Currency” means U.S. Dollars. 2024 D2 Legal Technology Ltd CONFIDENTIAL 22  PART 4 CALCULATION AGENT ELECTIONS Functions of a Calculation Agent: determines prices, rates, whether there is a credit event, etc. Third Party Calculation Agents: “…provided that, if an Event of Default is continuing with respect to Party A, the Calculation Agent will be [Party B] [an independent dealer selected by Party B] [reasonably acceptable to Party A.]” Disputes over Calculations – procedure typically features: 1. Period of 1-3 Business Days to give detailed notice in writing of dispute 2. Undisputed amounts are paid 3. Third party agents – average of 3 dealers or each party selects a dealer who jointly select a third 2024 D2 Legal Technology Ltd CONFIDENTIAL 23  PART 4 PAYMENT NETTING ELECTIONS Payments are netted if Reduces effect of 1 same due date; Reduces settlement risk withholding tax, if imposed 2 same currency; and 3 same Transaction 2024 D2 Legal Technology Ltd CONFIDENTIAL 24  PART 5 ESCROW PAYMENTS ELECTIONS Escrow Payments. If payments are not netted and it is not possible for simultaneous payments to be made on any date on which both parties are required to make payments hereunder – Either party may at its option and in its sole discretion notify the other party that payments on that date are to be made in escrow; Deposit of the payment due earlier on that date shall be made by 2:00 p.m. (local time at the place for the earlier payment) with an escrow agent selected by the party giving the notice; Accompanied by irrevocable payment instructions to: (i) release the deposited payment to the intended recipient upon receipt by the escrow agent of the required deposit of the corresponding payment or (ii) if the required deposit of the corresponding payment is not made on the same date, to return the payment deposited to the party that paid it in escrow. 2024 D2 Legal Technology Ltd CONFIDENTIAL 25  SECTION 6 SET-OFF SET-OFF Set-off acknowledges the existence of cross-claims between the parties but effects a discharge of them to the extent that the amounts are equivalent. Permits a party to set-off the close-out amount against any sum that is due to the counterparty under another agreement. Included in the body of the 2002 Master Agreement. Only applies where there is a defaulting party or one Affected Party and only at the option of the Non-defaulting Party or Non-affected Party. Set-off permitted even if the amount due under the other agreement is denominated in another currency from the close-out amount or is merely contingent. Should you use the right of set-off before terminating all Transactions? Unlikely – If only some transactions are Affected Transactions and so only a portion of outstanding Transactions are being terminated, then there is an on-going relationship and unilateral set-off is not appropriate If you weren’t terminating all Transactions, it would be drastic and counterproductive to a relationship to use a set-off 2024 D2 Legal Technology Ltd CONFIDENTIAL 26