ISDA Master

Agreements -
Confirmations
Agenda

In this session, you will learn about:

•Preface
•Role of ISDA
•Need of the Hour
•Architecture
•Hierarchy
•ISDA Master Agreement
•Provisions
•Schedule
•Various ISDA Documents
•Confirmations
•Best Practices

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Introduction to ISDA
International Swaps and Derivatives Association

1985
Year of
Charter

12 Member
Institutions

OTC

58
Derivatives
Countries Across
Market
Six Continents Participants
Forum

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Types of Members

Primary Associate Subscriber

Members Members Members

• Dealer Firms, • Service Providers • End-users

• ex – Investment • ex – Brokers • ex – Financial
Banks, Institutions
• Law Firms
• Commercial • Government
Banks • Accounting Firms Entities

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Role of ISDA
Key Role in Derivative Markets

Preventive Measures Corrective Measures

Identify and Reduce the Promotion of Risk Treatment and Risk
Sources of Risk Management Practices Management

Developing ISDA Master Standardization of

Public Policy
Agreement Documentation

Publication of Fostering High Standards Regulatory Capital

Documentation Materials of Commercial Conduct Perspectives

Legal Opinions on
Enforceability of Netting
and Collateral

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ISDA Documentation - Need
ISDA Documentation is a Substitute for Economic Legislation

Credit
Relationship
• Longer Tenure of
Contracts
• Fluctuating Credit
Worthiness of the Clients
Product Repetition of • Trade Replacement Cost
Complexity Interaction on Client Default

• Existing Economic
Laws are Not
Enough
• New Products
Appear too Often
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Architecture
Master Agreement

Standard Terms
•Multi Currency – Cross Border Master Agreement
•Local Currency – Single Jurisdiction Master Agreement

1. Schedule
2. Credit Support Documents
•Credit Support Annex – English
•Credit Support Annex – Japanese

3. Confirmations

4. ISDA Definitions

Credit Support Deed

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Credit Support Annex
Legal document which regulates credit support (collateral)
for derivative transactions.

• One of the four parts that make up

an ISDA Master Agreement but is not
mandatory.
• Defines the terms or rules under which
collateral is posted or transferred
between swap counterparties to
mitigate the credit risk arising from "in
the money" derivative positions.

It is possible to have an ISDA agreement

without a CSA but normally not a CSA
without an ISDA.
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Definition of Key Terms

Delivery Amount Collateral

• Collateral must meet

the Eligibility criteria
in the agreement
Amount the Credit
• E.g.: Which
Support Amount
currencies it may be
exceeds the Value of all
in, what types of
posted Collateral held by
bonds are allowed,
the Secured Party.
and
which haircuts are
applied.

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Credit Support Annex
If on any Valuation Date, the Delivery Amount equals or exceeds the Pledgor's Minimum
Transfer Amount, the Pledgor must transfer Eligible Collateral with a Value at least equal to
the Delivery Amount.

Delivery
Amount
Pledgor's Minimum
Transfer Amount

Pledgor must transfer Eligible

Collateral with a Value at least
equal to the Delivery Amount
Delivery Pledgor's Minimum
Amount Transfer Amount

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Definitions
ISDA also creates industry standards for derivatives and provides legal
definitions of terms used in contracts.

2014 ISDA Credit Derivatives

Definitions, which provide basic
definitions for
•Credit default swaps
•Total return swaps
•Credit linked notes and
•Other credit derivative transactions.

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ISDA Controversy

A controversy resulted over the definition of a "restructuring event" in connection

with the August 2000 restructuring of USD 2.8 billion of debt by an insurance12
Private and Confidential
company.
Definitions

Protection sellers had to

compensate for an event
that was seen as normal in
the credit business.

Complaints from protection sellers in credit default swaps.

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Definitions
There was also a fear of a conflict of interest, since protection buyers
had nothing to lose by agreeing to restructuring.

Protection Buyers

Protection buyers included some of the insurance company lenders.

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Supporting Material
ISDA has produced a wide array of supporting materials for the Master Agreement

Uses

Facilitate the Interpretation of the

Prevent Disputes
Consistent Use Master Agreement.

Basis for Division of Definitional Booklets

Credit Derivative Currency Derivatives Equity Derivatives

Definitions
and user's
Materials are produced by ISDA and are regularly updated to guides
reflect the most recent regulatory or market changes.

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Confirmations
Contract between the parties is formed when
derivatives transactions are entered into orally or electronically

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.

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Confirmations (Contd.)

Features of Confirmations

Contain little more Minimise the

Form set out in the
than dates, amounts, possibility of a
Master Agreement
and rates. dispute

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Schedule

• The Schedule and Paragraph 13 are used to make all amendments to and
customizations of the Master Agreement and Annex

• It includes the elections of the various options presented to the parties in the
Master Agreement and Annex and the addition of provisions not contained in
the Master Agreement.

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Constituents of a Schedule

Elections Referred Amendments Additional Terms

The payment measures Parties want to include,

and methods, the such as a set-off clause
Parties agree to make
thresholds relating to between close-out
certain events of default,
to the terms of the amounts and amounts
and the offices through Master Agreement owing under other
which parties can act contracts.

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Schedule – Don’t’s

In negotiations it is not
The printed form of the even exchanged, on the
Master Agreement is presumption that the
never amended on the standard terms will
face of the document. always be used

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The ISDA Hierarchy

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ISDA Master Agreement
Heart of Documentation

• Once signed, it governs all future individual transactions entered

into between the Counterparties
• Negotiation of Master Agreement - with care and prudence

Provisions

Interpretation Conditions Netting Withholding Tax

Precedent

Representations Undertakings Early Governing Law

Terminations

Known as a Boiler-Plate Document

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Provisions Of Master Agreement
Key Updates

Customization to suit both parties Open ended agreement with no fixed

term

Events of Default Termination Events Withholding Tax

Hierarchy of Events Governing Law Fall Backs

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The Schedule - Master Agreement
Features
• Integral part of Master Agreement

• Customizing by amending standard terms and specifying

details

• Negotiation skill, precision drafting required for Schedule

• Credit rating of clients considered

• Time consuming process

• Credit Support Documents-Credit Support Annex, Credit

Support Deed

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 ISDA Documents

• Definitions – Interest Rate

Definitions – Interest Rate Definitions – Interest Rate Derivatives Inflation
Derivatives FX Derivatives Derivatives • Inflation Derivatives Derivatives
Credit Derivatives

1998 2003 2008

1991 2000 2006
1993 1999 2002 2005 2007

Commodity Definitions Credit Derivatives Equity Derivatives Commodity • Property Index Definitions
Definitions • Give-Up Agreement and
Compensation Agreement
• ISDA Government Bond Option
Definitions
• Total Return Swap
Documentation

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Confirmations
Peculiarities for Confirmations for Derivatives Transactions

• Trade Specific terms are documented

• Unique for each trade
• Forwarded to Counterparty for acceptance
• Market Practice is to respond within 48 hours
• Templates by ISDA – Tailor made by parties
• Economic & Financial Payment Terms
• Schedule will prevail to Master Agreement
• Confirmation will prevail Schedule
• Language additions in Confirmation
• Executed vs. Exchanged

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ISDA Best Practices

Paper Confirmation

T 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
T+5: Non Receipt T+10: Mismatch T+15: Escalation T+20: Execution

Electronic Confirmation

T 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
T+2: Non T+3: T+5: T+7:
Receipt Mismatch Escalation Execution

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Key Provisions of the ISDA
Master Agreement

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ISDA Master Agreement- Key Provisions

Termination of
Obligations Representations Agreements Transactions

Consequences of Tax
Termination Considerations Other Provisions

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Section 2 – Obligations
Obliges the parties to make on-going payment and delivery obligations set
out in each confirmation

Conditions precedent to payment / delivery

#1 #2 #3

No event of No early
default or Payment /
termination date
potential event of delivery
designated
default

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Section 2 Payment Netting

Payment netting applies to payments and has administrative advantages

• On the same date
• In the same currency
• In respect of the same Transaction
Exceptions
• 1992 ISDA: Parties elect that Section 2(c) (ii) will not apply (Part 4(i) of
Schedule)
• 2002 ISDA: “Multiple Transaction Payment Netting” is elected in
Part4(i) of Schedule

Gross: $100mn
Net: $75mn
Party A Party B
Gross: $25mn

Operationally, ‘all Transaction’ netting may not be possible

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Section 2 – Deduction or Withholding for Tax

• Payments to be made without

deductions or withholdings
unless required by law

• If law does require, payment must

be ‘grossed up’

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Section 2 – Default Interest

Interest payable on defaulted payment obligations, until Early Termination Date

• Thereafter, Section 6(d)(ii)

• No default interest for defaulted
deliveries

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Section 3 – Representations and its Features
Repeated by each party on each date on which a Transaction is entered

All consents
obtained and
complied with
Power to
Legal, valid
execute and
and binding
perform
obligations

In case of payee tax

representation,
representations No
Duly are repeated at all
organised violation
times or conflict

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Section 3 – Representations

• No litigation occurring which could impact obligations (c)

• Accuracy of specified information (d)
• Signatory authority: Yes
• Constituent documents: Yes
• Audited financial statements: Arguable, but probably no
• External legal opinion: No
• Payer and payee tax representations are accurate and true (e) and
(f)
• 2002 ISDA (only if specified in Schedule) Acting as principal, not as
agent; Non-reliance; Assessment and understanding; Status of
parties: Not fiduciary or adviser

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Section 4 – Agreements

What do the parties agree to do?

Furnish specified Maintain

Comply with laws
information authorisations

Give notice of its

failure to maintain Pay stamp tax
tax reps

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Termination of Transactions

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Events of Default and Termination Events

Events of Default Termination Events

• Section 5(a) of 1992 and • Section 5(b) of 1992 and
2002 ISDA 2002 ISDA

• Fault based provisions • Non-fault based

provisions
• Option for non-
defaulting party to • Option for one or both
terminate all parties (Affected Party)
Transactions to terminate affected
Transactions

Private and confidential

Credit Support Providers and Specified Entities

• Some events of Default / Termination Events can be triggered with respect

to a “Credit Support Provider” or
“Specified Entity”
• “Credit Support Provider”
– Entity that supports the obligations of a party
– E.g. Guarantee (“Credit Support Document”)
– Specified in Parts 4(f) and (g) of the Schedule
• “Specified Entity”
– E.g. Affiliate companies
– Specified in Part 1(a) of the Schedule

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Events of Default

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Section 5(a)(i) – Failure to Pay or Deliver

• A party has failed to pay or deliver

• No Threshold Amount
• Other party gives notice of failure
• Failure is not remedied within
– 1992 ISDA: Three Local
Business Days of notice being
given
– 2002 ISDA: One Local
Business Day / Local Delivery
Day of notice being given

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Section 5(a)(ii) – Breach of Agreement

When has a party said to have has failed to perform any agreement or obligation

Failure is not
A party has failed to
Other party gives remedied within 30
perform any agreement
notice of failure days of notice being
or obligation e
given

Exceptions

Notice of Furnish Notice of failure

Payment /
Termination specified of a tax
delivery
Event information representation

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Section 5(a)(iii) – Credit Support Default

Scope
Party or any Credit Support Providers

• Failure to perform under Credit Support Document after grace period

or
• Expiration / termination / ceasing to be in full force and effect of Credit
Support Document prior to satisfaction of all obligations or
• Disaffirms, disclaims, repudiates Credit Support Document

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Section 5(a)(iii) – Credit Support Default

Scope
Party or any Credit Support Providers

Expiration /
termination /
Failure to perform ceasing to be in full Disaffirms,
under Credit force and effect of disclaims,
Support Document Credit Support repudiates Credit
after grace period Document prior to Support Document
satisfaction of all
or obligations or

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Section 5(a)(iv) – Misrepresentation

Scope
Applies to a Party or any Credit Support Provider

Representation incorrect
or misleading in any
material respect

No Grace Period

No Notice
Requirements

Applies to all representations

except Payer and Payee Tax
Representations

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Section 5(a)(v) – Default Under Specified Transaction

Amendments as per ISDA 2002

• Broader list of derivative Transactions (eg credit derivatives, weather

derivatives, repo and stock
lending Transactions)
• New type of derivatives that may be entered into in the future
• Explicitly states that Specified Transactions are not Transactions
under the ISDA

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Section 5(a)(vi) – Cross-Default

Scope
Parties elect in Part 1(c) of Schedule whether Cross-Default applies

• Default and acceleration / capable of acceleration

• Specified Indebtedness – defined as any obligation in respect of
borrowed money
• Not less than Threshold amount
– Specified in Part 1(c) of Schedule
– Credit / commercial point

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Section 5(a)(vi) – Cross-Default (cont’d)

Expanding Carving out Excluding Deleting

“Specified
Deposits taken
Indebtedness” to Defaults caused
in the ordinary Cross-
include third by technical
course of a acceleration
party derivative failure or good
party’s banking provision
Transactions faith disputes
business
(NB Threshold)

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Section 5(a)(vii) – Bankruptcy
Scope
Party, any Credit Support Provider or any Specified Entity
Meaning and Definition as per 1992 ISDA
• Dissolved
• Insolvent / unable to pay debts
• General arrangements
• Insolvency proceeding instituted and either order made or not dismissed
within 30 days
• Winding-up resolution
• Appointment of liquidator
• Enforcement of security and possession maintained / process not
dismissed within 30 days
• Analogous events
• Action in furtherance of above

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Section 5(a)(vii) – Bankruptcy (cont’d)

Automatic Early Termination can be specified in Part 1(e) of Schedule

Applicability
• (1), (3), (5), (6) and (8): “Immediately upon”
• (4) and (8): “Immediately preceding”
Purpose
•Try to ensure a close-out takes place before commencement of
insolvency proceedings as some jurisdictions may not uphold close-out
after commencement
•ISDA Opinions
Disadvantage
•Non-defaulting Party may not be aware

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Section 5(a)(viii) – Merger Without Assumption
Scope
Party and any Credit Support Provider

• Merger or asset transfer AND

– 2(a) New entity fails to assume all obligations or
– 2(b) Credit Support Document does not extend to new entity

• 2002 ISDA additions to merger / asset transfer

– Reorganisation
– Reincorporation or
– Reconstitution

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Confirmations

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What is a Confirmation?
Part of ‘single agreement’ (Section 1(c))

Constituents of a Confirmation

• Forms of Confirmation contained in ISDA Definitions booklets

• Transaction Specific Modifications
• Certain Elections
– E.g.: Application of Payment Netting, Additional Representations

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Execution / Exchange of Confirmations
Confirmation to be entered into as soon as reasonably practicable

• Parties legally bound by the terms

of each Transaction from the
moment they are agreed (whether
orally or otherwise)
• Exchange of telexes, fax, electronic
messages and (introduced by
2002 ISDA) e-mails

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Structure of a Confirmation

Introduction, Standard Paragraphs and

Sample Product-specific Provisions
Closing

Introduction Closing
Standard
Paragraphs

Transaction Specific Modifications Other Provisions

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Structure of a Confirmation (cont’d)

The Big Wig Company [Letterhead of XYZ [25 September 2011]

London Bank]
020 7614 2222

Attention: Paul Smith

Cross-Currency Interest Rate Swap Transaction Confirmation Reference: BWC / [26/9/11]
Dear Sir,

The purpose of [this] [fax / letter] (this “Confirmations”) is to confirm the terms and conditions
of the Swap Transaction entered into between us on the Trade Date specified below

The definitions and provisions contained in the 2000 ISDA definitions as published by the
International Swaps and Derivatives Associations Inc are incorporated into this confirmation.
In the event of any inconsistency between those definitions and provisions and this
Confirmation, this Confirmation will govern

This Confirmation constitutes a “Confirmation” as referred to [_?_] and [supplements], forms

part of and is subject to the ISDA Master Agreement dated as of 2 November 2002 as amended
and supplemented from time to time ([the] “Agreement”) between XYZ Bank (“Party A”) and
the Big Wig Company (“Party B”). All provisions contained in the Agreement govern this
Confirmation except as [expressly] modified below

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Structure of a Confirmation (cont’d)
The terms of the particular Swap Transaction to which this Confirmation relates are
Trade Date 26-Sep-11
Effective Date 30-Sep-11
Termination Date 30-Sep-16
Fixed Amounts
Fixed Rate Payer Party A
Fixed Rate Payer Currency
£68,674,700
Amount
Fixed Rate Payer Payment Dates 30 September and 30 March in each year, commencing on 30 March
2012 and ending on 30 September 2016 subject to adjustment in
accordance with the following Business Day Convention
Fixed Rate 4.50% per annum
Fixed Rate Day Count Fraction Actual / Actual
Floating Amounts
Floating Rate Payer Party B
Floating Rate Payer Current
114000000
Amount
Floating Rate Payer Payment 30 September and 30 March in each year, commencing on 30 March
Dates 2012 and ending on
30 September 2012 subject to adjustment in accordance with the
following Business Day Convention
Floating Rate Option [Euro-EURIBOR-Telerate]
Designated Maturity 6 Months
Spread Minus 2% per annum
Floating Rate Day Count Fraction Actual / Actual
Reset Dates Private
The first day ofandeach
Confidential
Calculation Period 57
Structure of a Confirmation (cont’d)
Business Days London and Target [settlement] Days
Calculation Agent Party A
Initial Exchange
30 September 2011 subject to adjustment in accordance with the
Initial Exchange Date
Preceding Business
Day Convention
Party A Initial Exchange Amount £68,674,700
Party B Initial Exchange Amount 114000000
Final Exchange
30 September 2011 Subject to adjustment in accordance with the
Final Exchange date
Preceding Business
Day Convention
Party A Final Exchange Amount 114000000
Party B Final Exchange Amount £68,674,700
Account Details
Account(s) for payments to Party A Account Number 123456 at Barclays Bank plc
Account(s) for payments to Party B Account Number 654321 at Lloyds Bank plc
Offices
(a) The Offices of Party A for the
Swap Transaction is London
(b) The Offices of Party B for the
Swap Transaction is London
Private and Confidential 58
Structure of a Confirmation (cont’d)

This Confirmation will be governed by and [construed] in accordance with

English law

Please confirm that the foregoing correctly sets forth the terms of our
agreement by executing the copy of this Confirmation enclosed for that
purpose and returning it to us or by sending to us a letter substantially similar
to this letter, which letter sets forth the material terms of the Swap Transaction
to which this Confirmation relates and indicates your agreement to these terms
Yours Faithfully,
XYZ Bank

Confirmed as of the date first above written

The Big Wig Company

By:_________________
Private and Confidential 59
Structure of Confirmation

If no ISDA Master Agreement is executed the following provisions should be

added

“This Confirmation evidences a complete and binding agreement between you

and us as to the terms of the Swap Transaction to which this Confirmation
relates. In addition you and we agree to use all reasonable efforts promptly to
negotiate, execute and deliver an agreement in the [form] of the (1992 / 2002)
ISDA Master Agreement (Multicurrency – Cross Border) (the “ISDA Form”), with
such modifications as you and we will in good faith agree. Upon the execution
by you and us of such an agreement, this Confirmation will supplement form a
part of and be subject to the agreement.

All provisions contained in or incorporated by reference in that agreement upon

its execution will govern this Confirmation except as expressly modified below.

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Structure of Confirmation

Until we execute and deliver that agreement, this Confirmation together with
all other documents referring to the ISDA Form (each a “Confirmation”)
confirming Transactions (each a “Transaction”) entered into between us
(notwithstanding anything to the contrary in a Confirmation), shall
supplement form a part of and be subject to, an agreement in the form of the
ISDA Form as if we had executed an agreement in such form (but without any
Schedule except for the election of (English Law) as the governing law and
(specify currency) as the Termination Currency) on the Trade Date of the first
such Transaction between us.

In the event of any inconsistency between the provisions of that agreement

and this Confirmation, this Confirmation will prevent purpose of this Swap
Transaction”

Private and Confidential 61

 Contact
[email protected]

Thank you
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