The International Swaps and Derivatives Association (ISDA) released the first-ever Master Agreement in 1992, which was a landmark document in the derivatives market. The Master Agreement provided a framework for documenting OTC derivatives transactions, which were becoming more prevalent at the time. Ten years later, in 2002, ISDA updated the Master Agreement to reflect market developments and changes in legal and regulatory requirements. In this article, we will compare the 1992 and 2002 ISDA Master Agreements to see how they differ.
Structure and Format
One of the most significant changes in the 2002 Master Agreement was the structure and format. The 1992 version had a relatively simple structure, with the main body of the agreement followed by various schedules and annexes. The 2002 version introduced a more comprehensive structure, with the main body of the agreement divided into sections and sub-sections. The schedules and annexes were also reorganized and updated.
Termination Events
Termination events are a critical feature of the Master Agreement, allowing parties to terminate transactions in certain circumstances. The 1992 Master Agreement had five termination events, including bankruptcy, failure to pay and cross-default. The 2002 version expanded this list to include additional events, such as credit events, hedging events, and force majeure. The 2002 version also clarified the definitions of some termination events to reduce ambiguity.
Close-out Amount
The close-out amount is the amount payable by one party to the other in the event of termination of the transaction. The 1992 Master Agreement used a market quotation method to calculate the close-out amount, which relied on the valuation of the relevant transaction in the market at the time of termination. The 2002 version introduced a new method, known as the loss calculation method. This method calculates the amount payable by reference to the loss suffered by the non-defaulting party in the event of termination.
Confirmation
Confirmation is the process of agreeing on the terms of a trade before it is executed. The 1992 Master Agreement did not include provisions on confirmation. The 2002 version introduced a new confirmation process, requiring both parties to confirm the trade details in writing within a specified period. The confirmation process aims to reduce the risk of disputes arising from trade details being misinterpreted or misunderstood.
Conclusion
The 2002 ISDA Master Agreement represented a significant update to the original 1992 version, reflecting two decades of experience in the derivatives market. The changes made in the 2002 version aimed to improve clarity, reduce ambiguity, and reflect changes in legal and regulatory requirements. While the 1992 version is still in use today, the 2002 version is the most widely used Master Agreement in the derivatives market. As with any legal document, it is essential to understand the differences between the two versions to ensure compliance with your obligations and protect your interests.
