The framework consists of a master agreement, a schedule, confirmations, definition booklets, and credit support documentation.
[1] The move to update the 1992 Agreement had its origins in the succession of crises that affected the global financial markets in the late 1990s.
These events, including the liquidation of Hong Kong broker-dealer Peregrine Investments Holdings and the 1998 Russian financial crisis, tested the ISDA documentation to a previously unseen degree.
The Termination Events are other events which, although no-one is at fault, warrant the early termination of the transactions, such as a change in tax law resulting in taxes being imposed on transactions, illegality, and a merger of a party resulting in a deterioration in its credit quality.
There are two elections that the parties make in the Schedule which affect the operation of these provisions: The above only applies in relation to the 1992 Master Agreement.
In practice First Method was very rarely opted for because its use required the relevant financial institutions to report their gross, rather than net, exposure under the Master Agreement.
The 2002 Master Agreement also replaced the distinction between Market Quotation and Loss with a single concept, "Close-out Amount".
Section 2(d) of the ISDA Master Agreement contains provisions setting out the consequences if a tax is imposed on a payment required to be made by a party under a transaction.
Section 10 of the ISDA Master Agreement addresses issues that arise in connection with counterparties that enter into transactions through more than one office or branch and more than one jurisdiction.
The use of one or more credit support documents is optional but is common in Master Agreements for OTC derivative transactions.
The evidence of the terms of the transaction is contained in a confirmation (also known as a trading advice or contract note), usually a short letter, fax or email.
ISDA has produced a wide array of supporting materials for the Master Agreement, including definitions and user's guides.
Set-off is used as a final settlement of accounts that extinguishes the mutual debts owed between the parties in exchange for a new, net amount due.
The parties are incentivized to pay in a timely manner by the imposition of interest on any amounts paid after the due date.
In essence it is necessary to examine the relevant circumstances to determine whether the individual had the actual or apparent authority to bind the company to the transaction.
It is common for parties to exchange authorised signatory lists of persons who have authority to execute confirmations and refer to this in the Schedule to the ISDA Master Agreement.
Parties try to limit this responsibility by including "non-reliance" representations in their agreements, to the effect that each is not relying on the other and they are making their own independent decisions.
Originally devised with the banks and other institutional players in mind, the doors were opened to ultra-high net worth individuals.