International Swaps and Derivatives Association

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ISDA logo (older version)

The International Swaps and Derivatives Association (ISDA) is a trading organization of participants in the market for OTC derivatives with currently more than 800 members from almost 60 countries, which aims to simplify the trading of privately traded derivatives in a variety of ways. The association is mainly known for the ISDA Master Agreements it has developed and issued , a series of framework agreements for trading in specific OTC products in which basic contractual obligations between the trading parties are specified.

ISDA's headquarters are in New York .

history

Foundation phase

The ISDA emerged at the beginning of 1985 from the efforts of some swap dealers, which began the previous year, to work out standardized contractual conditions for trading interest rate swaps . The background to this initiative was the considerable transaction costs that OTC transactions previously entailed, including, for example, legal fees for drafting individualized contracts on the complete transaction conditions and the time required to agree on basic contractual definitions. In addition, the lack of standardization of the tradability of concluded derivatives on a secondary market stood in the way, since in each case it had to be checked individually whether and under what conditions the product was transferable at all. In June 1985, the ISDA issued the Code of Standard Wording, Assumptions and Provisions for Swaps , which was expanded just a year later, a first document with basic conceptual definitions for the drafting of contracts, which, however, still exclusively relates to trading in US dollar based interest rate swaps. The narrow scope of application did not yet allow widespread use and the goal of standardization could only be achieved inadequately because individual agreements were still necessary and the ISDA model definitions were used to varying degrees by market participants and adapted to their own concepts.

With the Interest Rate and Currency Exchange Definitions published in 1987 , which contained basic definitions of terms and stipulations for further contractual stipulations between the parties involved, as well as the Interest Rate and Currency Exchange Agreement, with which the ISDA now also provides a first actual framework agreement for trading with Interest rate and currency swaps in several currencies were created, the organization laid the foundation for the large-scale and, in particular, worldwide implementation of its templates. The agreement contained the framework contract, which was agreed once between two parties - this contained general principles of the contractual relationship; the contract deviating provisions were summarized in an annex (Schedule) be set - the specific conditions of individual transactions were in short separate acknowledgments (confirmations) set. The development process of the document was based on the concept of only adopting approaches explicitly in the agreement if there was agreement ; If, on the other hand, there were major differences between the market participants, several options were recorded in the schedule section from which the participants could freely choose when the contract was concluded; this also formed the basis for the later master agreements . The main achievement of the agreement (also in the later versions) was the definition of a netting process, through which, for example, existing claims from different transactions could be offset against each other.

Meanwhile, towards the end of the 1980s, against the background of a booming OTC market, the political function of the organization increased in such a way that it increasingly established itself as a quasi-representative of the OTC derivatives industry. ISDA members and representatives took their position before congress committees and were increasingly in dialogue with regulatory authorities.

1990s until today

After the Interest Rate and Currency Exchange Agreement of 1987 was supplemented by several annexes in the following years, which, taking into account innovations in the market, gradually expanded its regulatory circle to include interest rate caps and interest floors (1989 cap addendum) and swaptions (1990 option addendum) , the documents were finally incorporated in an updated form in the ISDA Master Agreement in 1992 . Its possible uses extended beyond those of its predecessor in that it was principally designed for use with more or less all (then) OTC derivatives, including, for example, commodity swaps, currency options or index swaps. The agreement was, strictly speaking, of two parts, one version for domestic and another for cross-border and cross-currency transactions. In the years that followed, the ISDA published several collections of definitions, through which the purpose of the master agreement could be expanded, including for commodity derivatives and certain bond options as well as the CDS products (1999 Credit Derivatives Definitions) that are widely used today .

In 2002 the ISDA published a new version of the Master Agreement, which was supposed to take into account the many changes in the market that had taken place over the past decade. It was up to the market participants whether they wanted to keep their old contracts entirely, to add a few new parts (standard form amendments) or - which was less common for reasons of the effort involved - to replace them completely with the new framework contract.

In 2003 a new version of Credit Derivatives Definitions was published, which has been expanded and revised again and again in the following years. The changes culminated in several protocols in March and July 2009 in the wake of the global financial market crisis, which were a reaction to the high number of credit events during this period. In the so-called March Settlement , a new settlement method was added to the 2003 regulation (auction settlements) and heterogeneities in the classification of credit events were to be eliminated by setting up special committees (credit derivatives determinations committees; "DC") that are now divided into regional areas of responsibility. should decide on their determination and monitor the resolution process. In order to implement these regulations not only for future contract drafts, the ISDA also presented the Big Bang Protocol , through whose accession the parties could also adapt the new regulations retrospectively for CDS transactions that had already been carried out.

Basic principles of the master agreement

The entire contractually stipulated ISDA documentation (according to the versions from 1992 and 2002) basically consists of the following parts:

  1. the standard master agreement;
  2. the appendix (schedule) in which modifications and additions to the master agreement are agreed;
  3. the credit support annex as part of the schedule, in which, usually relating to the entire master agreement , basic provisions for collateral acceptance are stipulated, or alternatively a credit support deed with the same regulatory character, but differing in the details of the intended modalities;
  4. a large number of individual determinations (confirmations) for individual transactions.

The parties initially define the standard framework agreement including the schedule and credit support annex . Individual transactions are then contractually recorded by means of a confirmation , in which transaction-specific details are specified. This determination is made in turn using the definitions of one or more of the slightly more than a dozen collections of definitions published by the ISDA. From a legal point of view, the ISDA set of rules intends that with each agreed confirmation, an overall contract consisting of elements 1–4 is created - the extent to which this can be legally implemented is, however, controversial.

ISDAfix

Since 1998, the ISDA has issued a series of reference interest rates for interest rate swap transactions under the name ISDAfix .

criticism

The ISDA encountered criticism in the course of the Greek financial crisis for its procedure for determining credit events within the framework of the CDS toolkit. The focus is in particular on the fact that the competence to determine whether a credit event - and thus the payment of CDS premiums - was triggered by restructuring measures on Greek government bonds ultimately rests with 15 representatives of the financial industry who are represented on the European Determination Committee . Critics fear, among other things, that this could lead to conflicts of interest.

literature

  • Allen & Overy : An Introduction to the Documentation of OTC Derivatives. 2002, Internet http://www.isda.org/educat/pdf/documentation_of_derivatives.pdf (PDF file, 0.1 MB), accessed on March 11, 2012.
  • Binder, Ilsa: ISDA Documentation of Credit Default Swaps. In: Josef Gruber, Walter Gruber and Hendryk Braun (eds.): Praktiker-Handbuch Asset-Backed-Securities and Credit Derivatives. Structures, pricing, possible applications, supervisory treatment. Schäffer-Poeschel, Stuttgart 2005, ISBN 3-7910-2300-4 , pp. 455-474.
  • Flanagan, Sean M .: The rise of a trade association: Group interactions with the International Swaps and Derivatives Association. In: Harvard Negotiation Law Review. No. 6, 2001, pp. 211-264.
  • Harding, Paul: Mastering the ISDA Master Agreements. A Practical Guide for Negotiation. 3. Edition. Prentice Hall, 2010, ISBN 978-0-273-72520-6 .
  • Muscat, Bernadette: OTC Derivatives: Salient Practices and Developments Relating to Standard Market Documentation. In: Bank of Valletta Review. No. 39, 2009, Internet http://www.bov.com/filebank/documents/32-47%20Bernadette%20Muscat.pdf (PDF file, 0.2 MB), accessed on March 11, 2012.
  • von Sachsen-Altenburg, Henning: The ISDA Master Documentation. In: Jean-Claude Zerey (Ed.): Financial derivatives. Legal manual. 2nd edition. Nomos, Baden-Baden 2010, ISBN 978-3-8329-5072-9 , § 6 (pp. 143-180).
  • Zobl, Dieter and Thomas Werlen: 1992 ISDA Master Agreement. With special consideration of the swap transactions. Schulthess Polygraphischer Verlag, Zurich 1995, ISBN 3-7255-3364-4 .
  • Reiner, Günter: ISDA Master Agreement: Commentary , CH Beck 2013, ISBN 978-3-406-63168-9

Web links

Individual evidence

  1. ↑ About ISDA. International Swaps and Derivatives Association, accessed March 9, 2012 .
  2. ↑ a b Allen & Overy 2002, p. 3.
  3. ↑ Flanagan 2001, p. 232.
  4. ^ Von Sachsen-Altenburg 2010, Rn. 5.
  5. ^ Von Sachsen-Altenburg 2010, Rn. 7th
  6. ↑ Flanagan 2001, p. 243.
  7. ^ Von Sachsen-Altenburg 2010, Rn. 7 f.
  8. ↑ Flanagan 2001, p. 245.
  9. ↑ Flanagan 2001, p. 231.
  10. ↑ Flanagan 2001, p. 245 f.
  11. ↑ Muscat 2009, p. 37; Allen & Overy 2002, p. 3.
  12. ↑ Allen & Overy 2001, p. 4.
  13. ^ Uwe Jahn in Herbert Schimansky, Hermann-Josef Bunte and Hans-Jürgen Lwowski (eds.): Bankrechts-Handbuch. Vol. 1st 4th edition CH Beck, Munich 2011, ISBN 978-3-406-61811-6 , § 114 [“OTC derivatives)"], Rn. 61.
  14. ↑ There are currently five such committees: North, Central and South America; Asia excluding Japan; Japan; Australia and New Zealand; Europe, Middle East and Africa (EMEA). See ISDA Determinations Committees (effective November 30, 2011). (No longer available online.) International Swaps and Derivatives Association, archived from the original on February 26, 2012 ; accessed on March 11, 2012 (English). Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. @1@ 2Template: Webachiv / IABot / www.isda.org
  15. ↑ a b Torsten Schwarze: Reform of the CDS settlement by Big Bang and Small Bang in 2009. In: Journal for banking and capital market law. 1/2010, pp. 42–44, here p. 43.
  16. ↑ See von Sachsen-Altenburg 2010, Rn. 14th
  17. ↑ HM Revenue & Customs: CFM13100 - Understanding corporate finance: derivative contracts: documentation: the ISDA Master Agreement. Internet http://www.hmrc.gov.uk/manuals/cfmmanual/cfm13100.htm , accessed March 16, 2012.
  18. ^ Von Sachsen-Altenburg 2010, Rn. 27.
  19. ↑ See IFR-Defending the ISDA Determinations Committee . Reuters, August 8, 2011, accessed March 16, 2012.