Isda publishes new master agreement

Industry trade body the International Swaps and Derivatives Association has produced a new ‘master agreement’, a legal contract designed to standardise over-the-counter derivatives deals. It is the first time the document has been revised since 1992

The latest contract, called the 2002 Isda Master Agreement, has a number of new provisions that Isda claims will make derivatives markets more efficient.

The calculation of losses in the event of a counterparty defaulting is among the changes. The old document gave dealers two methods by which they could calculate their loss – one based on attaining market quotes to work out the value of the contract, the other based on the dealer simply guessing the expected loss.

Isda said the new, single method, which is called 'close-out amount', reflects the increase in volume and complexity of transactions during the past decade. Kimberley Summe, general counsel with Isda in New York, said the new rule still gives dealers “flexibility” in the way they calculate the loss. “But it is combined with objectivity in what is considered to be commercially reasonable data,” Summe said.

Isda also removed 'grace periods' associated with default from three days to one day. The grace period gives a defaulting party time to remedy its failure before a deal is finally closed. And the association included a 'set-off provision' in the new agreement, which lets the non-defaulter explore the possibility of finding other assets, such as a deposit account, that could be attached and set-off against the amount the defaulting party owes.

Meanwhile, the 2002 standard includes a 'force majuere termination event' clause, which lets parties terminate transactions affected by certain events beyond their control, such as natural or man-made disasters.

Robert Pickel, Isda chief executive, said the new master agreement represents a milestone in the association's efforts to reduce risk and promote practices conducive to the efficient conduct of the derivatives business. “It also strengthens the ability of market participants to more effectively manage risk amid the continuing growth and development of the derivatives industry,” added Pickel.

Isda said the 2002 master agreement is the product of two years of work that included hundreds of individuals representing companies from all market segments and regions.

Isda also released new equity derivatives guidelines, with coverage of various barrier options and forwards, and provisions relating to the pricing of products in the event of a disruption to trading activity. It intends to publish new credit derivatives guidelines in the coming weeks.