Revelation: the ISDA Master Agreement and Related Arrangements

An ISDA Protocol takes the strain out of the re-documentation. The Protocol is an agreed non-negotiable set of amendments which market participants can adhere to. You adhere once to the
October 14, 2015 - Editor
Category: ISDA

An ISDA Protocol takes the strain out of the re-documentation. The Protocol is an agreed non-negotiable set of amendments which market participants can adhere to. You adhere once to the Protocol and check the website to monitor which of your counterparties have also adhered to those amendments. The Documentation between you and each adhering party is automatically amended as a result of you both adhering to the Protocol.

Revelation: the ISDA Master Agreement and Related Arrangements

By Iona Levine

Revelation1 and the ISDA Master Agreement and Related Arrangements,2 have a number of things in common:

(i) they are completely impenetrable to the uninitiated and use mystical sounding language (the number of the beast is 666 or in ISDA speak first method, second method, cleared netting sets, modification change event).
(ii) they both tell of apocalyptic events, in the case of ISDA a selection of the main apocalyptic events, which they are trying to guard against are:

a)  that an insolvency practitioner will be entitled to cherry pick and select only those contracts that are profitable to his client;

b)  that collateral posted to the non defaulting counterparty has not been posted in a legally effective manner and cannot be applied or utilised in the way in which the non defaulting party had been counting upon and instead needs to be returned to the insolvency practitioner of the defaulting counterparty;

c)  that the non defaulting counterparty is stayed from exercising its close out rights under the documentation, for a specific or limited period and during this time the value of the transaction to the non defaulting party beings to appreciate and at the same time the value of the posted collateral takes a sharp dive;

d)  the devil is in the detail!

In deference to my publishers, I consider the Master Agreement and Related Arrangements in terms of a Rocket (See Figure 1).

1.1 The Engine: The ISDA Master Agreement


The Master Agreement in its pristine form is a booklet of 36 pages.

  • the first part of the Agreement is a densely printed form of legal text which contains Sections 1-14 (pages 1-28)
  • the second part of the Agreement is the Schedule (pages 29-36 or more, depending upon the parties appetite for bespoke clauses).

All party specific information is included in the Schedule and no amendments are ever physically made to the first part of the Agreement. Instead, all amendments are made in the Schedule.

You will not discover what an interest rate swap or a commodity option is, or how it operates from reading the Master Agreement itself, instead it is largely product agnostic and broadly you can use it to document any transaction which has a cash flow, currency, commodity, bond and then some more.3

It is a bilateral agreement that represents the basic framework of what has been agreed between the parties, the actual economic and other details of the deals or “Transactions” are set out in the Confirmation. The Master Agreement and all Confirmations are designed to form a single agreement between the parties.

Much to relief of both the reader and the author, space does not permit an in depth- analysis of every provision of the document, so the following Sections contain a detailed aerial view of the document.

The First Part of the Agreement Sections 1-14

Section 1: Interpretation

  • States that the definitions set out in Section 14 and elsewhere in the Master Agreement will apply;
  • Contains a key provision that all Transactions are entered into on the basis that the Master Agreement and all Confirmations are designed to form a single agreement between the parties.

Section 2: Obligations

Sets out the core obligations of the parties which include:

  • to make each payment or delivery specified in each Confirmation (subject to the other provisions of the Agreement);
  • netting of payments, provides that amounts due on the same date, in the same currency will be netted. It is possible to opt for a more sophisticated method of payment netting by making a specific election at Part 4 (i) of the Schedule;
  • contains gross up mechanics relating to deductions or withholding for Tax;
  • Section 2(a) (iii) which broadly provides that the obligations to make a payment or delivery under Section 2(a)(i) is subject to the conditions precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, has been the subject of extensive litigation.

Section 3-4: Representations and Agreements

  • Sets out certain representations which apply to the parties including those Additional Representations (if any) set out in the Schedule;
  • Sets out a list of actions which the parties agree to perform e.g.: delivering specified information.

Section 5: Events of Default and Termination Events

The core of the document is set out at Sections 5 and 6.
From an overview perspective these are the Sections which set out the Events of Default, and the Termination Events, set out how a right to terminate is triggered and by whom, (depending upon the circumstances), sets out precisely what is terminated and the consequences of such termination.

Section 5(a) sets out the following 8 Events of Default:

i. Failure to pay or deliver;
ii. Breach of Agreement; Repudiation of Agreement;
iii. Credit Support Default;
iv. Misrepresentation;
v. Default under Specified Transactions;
vi. Cross Default (this is an optional event and will not apply unless a specific election is made at Part 1(c) of the Schedule); vii. Bankruptcy
viii. Merger without Assumption.

Many of the definitions embedded in these Events of Default will not have a meaning unless that meaning is filled in in the Schedule, e.g. Specified Entity this will have no meaning in relation to par ty A or par ty B until the meaning is inser ted into the Schedule.

Section 5 (b) sets out the following 6 Termination Events:

i. Illegality
ii. Force Majeure Event
iii. Tax Event
iv. Tax Event upon Merger
v. Credit Event Upon Merger (this is an optional event and will not apply unless a specific election is made at Part 1(d) of the Schedule);
vi. Additional Termination Event (this is an optional event and will not apply unless a specific election is made at Part 1(g) of the Schedule);

The basic idea between splitting events into Events of Default and Termination Events, is that a party can control whether or not an Event of Default has occurred and is therefore at fault, whereas a Termination Event may be something wholly or partly outside the control of a party e.g.: a Force Majeure Event.

Its important to be accurate in characterising an event and not to characterise something as an Event of Default when it should really be characterised as a Termination Event because an Event of Default under the Master Agreement could trigger cross defaults under a party’s banking and other arrangements. There is a helpful clause at 5(c) hierarchy of events which helps to address this issue.

Section 6: Early Termination and Close-Out Netting

  • Section 6(a) sets out a party’s right to terminate following an Event of Default and introduces the concept of Automatic Termination.

Automatic Termination means that an Early Termination Date will automatically be deemed to have occurred upon the occurrence of one of certain very specific bankruptcy/insolvency events set out at 5(a)(vii)(1),(3)(5)(6) or to the extent analogous thereto(8).

A party will select whether or not Automatic Early Termination should apply to its counterparty by ticking the election in the Schedule. The relevant ISDA Opinion will determine whether this election should be made.

For all other Events of Default or where Automatic Early Termi- nation has not been selected, termination will take place by providing a notice.

  • Section 6 (b) sets out a party’s right to terminate following a Termination Event and prescribes certain detailed mechanics.
  • A combination of 6(c), (d) and (e) sets out:
    • i. the effect of the occurrence or designation of an Early Termination Date;
    • ii. sets out the method for calculating the amount that is due to or from a Defaulting Party in the case of an Event of Default;
    • iii. sets out the method for calculating the amount that is due to or from an Affected Party in the case of a Termination Event and further refines this by addressing the situation in which there is one Affected Party or Two Affected Parties.
  • Contains a limited and very specific Set-off clause.

It should be noted that termination upon the occurrence of any Event of Default results in the termination of all Transactions under the Agreement, whereas termination upon the occurrence of a Termination Event results in the termination of Affected Transactions.

Sections 7, -12 Notices, Expenses etc

  • These sections contain a number of miscellaneous and boilerplate clauses, that oil the engine of the document
  • Section 10 sets out the extent to which the head office is liable for transactions entered into through a branch office by making an election at Part 4(c) of the Schedule. Allows the parties to state whether they are going to be acting on a multi-branch basis by making an election at Part 4(d) of the Schedule.

Section 13 Governing law and Jurisdiction

  • The Agreement will be governed by the law specified in the Schedule, the remainder of this Section includes provisions dealing with Jurisdiction, Service of Process and Waiver of Immunities.

Section 14 Definitions

To make the document easier to read it is helpful to note that there are three types of definitions:

i. those that have the definition set out alongside them in Section 14;

ii. thosethathaveameaningelsewhereinthedocument;

iii. those that only have a meaning once the variable informationhas been included for each counterparty in the Schedule.

The Second Part of the Agreement: the Schedule

Whilst the text of the body of the agreement is dense, the Schedule is a series of provisions that need to be completed in order to provide detailed meaning to the body of the Agreement.

The Schedule itself is divided into five parts. Each major counterparty will have its own standard form Schedule with its own bespoke clauses and this is where the negotiations and the fun starts.

Part 1-4 of the Schedule

The body of the Agreement has been drafted on an even handed basis, so that the events of default, representations etc. apply equally to both parties without distinguishing between counterparty types, corporate structure or creditworthiness. The Schedule is the place where the parties reflect such differences.

Schedule Part 1:

Requires the parties to complete certain provisions or make certain elections in relation to a number of matters including the application of Automatic Termination, Cross Default, Credit Event Upon Merger and Additional Termination Event.

Schedule Part 2:

Sets out certain Tax Representations which the parties are required to complete.

Schedule Part 3:

Provides a space for the parties to set out the tax and other documents which the parties agree to deliver.

Schedule Part 4:

This is a mixed bag of provisions which the parties need to complete or elect to apply e.g.: Governing Law, Additional Representations, Multi-branch, Credit Support Provider, Credit Support Document.

Part 5 of the Schedule entitled: Other Provisions

This is where things begin to get creative and ever more bespoke. In a badly conducted negotiation it’s the final battlefield where the two armies often get entrenched and refuse to agree to their counterparty’s bespoke clauses.

  • It should be the place where the parties include very counterparty specific information that does not fit conveniently into other parts of the Schedule;
  • It may be used to include Dodd Frank/ EMIR language for where the counterparty has not adhered to the Protocol;
  • It may make reference to various Definitions Booklets, or those references may be made in a Confirmation;
  • It will often include an expanded Set-off clause.

1.2 The Propellant

One of the functions of collateralisation is to provide a real boost by enabling the parties to enter into more transactions. In the next article in this series we examine the main ISDA collateral documents4 and look at the use of the more recent documentation.5

2. The Nose Cone: The Confirmations

There are long form confirmations, master confirmations and short form confirmations. The simplest confirmation is the short form which:

  • Incorporates the relevant Definitions
  • Contains the details of the actual economic terms of the Transaction
  • Includes any other term or provision which is specific to the Transaction.

3. The Fins: Definitions Booklets and Protocols

3.1 Right Fin: Definitions Booklets

  • There is an extensive range of Definitions booklets,6 some of which have been updated at various intervals to cover an expanding range of products or new developments in a specific marketplace.
  • In addition to the definitions, the booklets also contain specimen Confirmations and notices given in respect of a particular asset class.

3.2 Left Fin: Protocols

The Master Agreement is a bilateral agreement and if a party wished to amend its documentation (to take into account a new market development or a new legal or regulatory requirement) it would normally need to repaper and sign amendment documentation with all of its counterparties.

An ISDA Protocol takes the strain out of the re-documentation. The Protocol is an agreed non-negotiable set of amendments which market participants can adhere to. You adhere once to the Protocol and check the website to monitor which of your counterparties have also adhered to those amendments. The Documentation between you and each adhering party is automatically amended as a result of you both adhering to the Protocol.

The ISDA 2013 Emir Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol, is an example of a very successful Protocol, it enabled the parties to amend their Master Agreements to reflect the requirements of EMIR.

4. [Boosters]/ [Exhausts]: ISDA/FOA Client Cleared OTC Derivatives


This represents ISDA’s first major foray into clearing and will be discussed in detail in a later article in the series.

5. Bolt on Pieces

ISDA publishes various Bridge Agreements7. Broadly they are a way of ensuring that cross product close-out netting will take place between two parties who have entered into an ISDA Master Agreement and who have also entered in other types of transactions under non ISDA Agreements, in an Armageddon l situation.

6. Parachutes

6.1 Users Guides

There are a number of Users Guides, to the various documents, they can be likened to commentaries on the separate chapters of the Book of Revelation.

6.2 Opinions

The ISDA Master Agreements (2002 and 1992), and the Credit Support Documentation are underpinned by a large number of extremely impressive and very useful legal opinions. These opine upon the effectiveness of the termination, close out netting, multi-branch and collateral provisions of the documentation when used with a very wide range of international counterparties.


Its fair to say that ISDA documentation is a complicated beast, however this is due to the fact that it sets out to achieve an enormous amount, in a flexible and extremely market focussed manner:

  • it covers the widest range of asset classes of any standard form market document;
  • it covers complex as well as vanilla transactions within the various asset classes and is always at pains to capture every possible bell and whistle;
  • it is a truly global multicurrency document which may be easily customised for use with a wide range of different counterparty types in an enormous amount of jurisdictions;
  • it provides a significant amount of choice and optionality in relation to how the parties may wish to handle certain specific situations. More choice and more optionality mean more complexity and more word
  • it continues to grow and develop to meet new market, legal and regulatory challenges.

It faced its own horseman of the Apocalypse in the guise of the Lehman crisis and very largely triumphed.


1 Revelation is the final book of the New Testament, it is an apocalyptic prophesy, and is not without its critics. Like the ISDA Suite of Documents It has been the subject of much detailed analysis.

2 In this Article I provide an overarching introduction to the 2002 version of the Master Agreement. However a number of counterparties exhausted by negotiation of the 1992 Master Agreement continue to use the 1992 form of Agreement together with updates. For a full list of ISDA Agreement and related documents please see the ISDA website

3 The ISDA Legal Opinions contain a useful set of product descriptions at Appendix A.

4 1995 ISDA Credit Support Annex governed by English law, 1995 ISDA Credit Support Deed governed by English law, 1994 ISDA Credit Support annex governed by New York Law.

5 ISDA Standard Credit Support Annexes 2013 and 2014 governed by English Law or New York Law, 2001 ISDA Margin Provisions.

6 E.g.: ISDA 2014 Credit Derivatives Definitions, ISDA 2011 Equity Derivatives Definitions, ISDA Definitions 2006.

7 E.g.: 2001 ISDA Cross Agreement Bridge; 2002 ISDA Energy Bridge.

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