About ISDA

Since its founding in 1985, the International Swaps and Derivatives Association has worked to make
over-the-counter (OTC) derivatives markets safe and efficient.
ISDAs pioneering work in developing the ISDA Master Agreement and a wide range of related
documentation materials, and in ensuring the enforceability of their netting and collateral
provisions, has helped to significantly reduce credit and legal risk. The Association has been a leader
in promoting sound risk management practices and processes, and engages constructively with
policymakers and legislators around the world to advance the understanding and treatment of
derivatives as a risk management tool.
Today, ISDA has over 800 member institutions from 60 countries. These members include a broad
range of OTC derivatives market participants including corporations, investment managers,
government and supranational entities, insurance companies, energy and commodities firms, and
international and regional banks. In addition to market participants, members also include key
components of the derivatives market infrastructure including exchanges, clearinghouses and
repositories, as well as law firms, accounting firms and other service providers.
ISDAs work in three key areas reducing counterparty credit risk, increasing transparency, and
improving the industrys operational infrastructure show the strong commitment of the
Association toward its primary goals; to build robust, stable financial markets and a strong financial
regulatory framework.
Mission Statement: ISDA fosters safe and efficient derivatives markets to facilitate effective risk
management for all users of derivative products.
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Taken from www.Isda.org

Architecture/Structure: ISDA Agreement comprised of The Master Agreement, The Schedule and The
Confirmation. The Architecture of ISDA Agreement is illustrated as below

ISDA Master Agreement governs the overall relationship between the parties, it provides two very
important benefits: certainty and consistency. Without a master agreement, the rights and
obligations of the parties in the event of a dispute would be governed by a combination of statute,
common law and market practice. These could vary from transaction to transaction, depending on
the determination in each instance of the appropriate venue and the applicable law. With an IDSA
Master Agreement, the parties can select, in advance, the venue and the law for adjudicating all
disputes under the agreement, eliminating at least one element of uncertainty in the dispute
resolution process.
Explanation with example: When two parties located in different countries comes into a derivative
contract as counterparties i.e. sign an OTC derivative contract, in case of any disputes the question
remains on the law to be followed and abided. This is because the counterparties belong to different
countries and the law governed in respective country may not be the same. Therefore there will
always be a case of ambiguity and uncertainty, to avoid this ISDA Master Agreement allows the
counterparties to select the law to be followed in any disputes.
Because the ISDA Master Agreement represents accepted market practice, there is widespread
familiarity with its terminology and provisions among market participants in every major financial
market. The familiarity of market participants with the ISDA Master Agreement can simplify the
negotiation process and provide significant cost savings to both counterparties.
Schedule: The standard schedule to the ISDA Master Agreement (the Schedule), permits the
parties to customize the Agreement, addresses the major issues, such as the identification of
Specified Entities (such as the parties to the transaction), the determination of Threshold Amount
(such as contract value), and the applicability of certain Events of Default that are likely to arise in
the course of a derivatives transaction. Consequently, it provides a useful checklist for lessexperienced end-users and an efficient mechanism for getting these issues on the table in the course
of the negotiation, giving the end-user a more complete picture of the risks entailed in the covered
transactions. Once the end-user becomes familiar with the Schedule, and the manner in which it
addresses the issues, future negotiations should proceed more smoothly.
Under ISDA Master Agreement, in the event of a default under any derivatives transaction governed
by the Agreement, the non-defaulting party has the contractual right to terminate all transactions
under the Agreement. All the amounts owed in connection with those transactions are then
netted to yield one net amount payable by one party to the other.
Example: Netting
Netting becomes important if two parties have
a number of transactions between them and
then one is declared bankrupt. The netting
provisions ensure that Bs payments are
netted against receipts from A. This ensures B
does not have to wait to receive his dues. And
A is unable to cherry-pick which transactions
he will honor.

Netting puts B ahead of everyone else in the liquidation queue and allows him to net off his
payments due against receipts. This is not an acceptable legal position in every jurisdiction. Typically
a court will force B to pay and then wait to receive his dues from the court. This may not come or
may be only a part settlement.
Benefits of ISDA
Sets the ongoing legal and credit relationship between two parties
So, each time they entered into a transaction, they would only have to negotiate and
document the economic terms of the transaction
There is no need to negotiate a whole host of issues
They still can amend/modify parts of the Master Agreement if they wish
It is a Multi-product agreement: covers different transaction types between the
counterparties