What is a Master Swap Agreement?
The term master swap agreement refers to a standardized agreement between two parties who agree to enter into an over-the-counter (OTC) derivative agreement.
- A master swap agreement is a standardized agreement between two parties that enter into an over-the-counter derivative agreement.
- It was founded by the International Swaps and Derivatives Association and is internationally recognized.
- This contract is typically used between parties operating in different jurisdictions and when different currencies are involved.
- Master swap agreements provide legal protection to the parties while providing information about the parties and an overview of the terms and conditions of the transaction.
- There are two versions, the original 1992 contract and the renewed 2002 version.
Understand master swap contracts
The Master Swap Agreement was established in 1992 by the International Swaps and Derivatives Association (ISDA) and is internationally recognized. It is used between parties operating in different jurisdictions and when different currencies are involved. A master swap agreement identifies each party, outlines the terms and conditions of the agreement, and provides legal protection to both parties involved. Updated in 2002.
A swap is a derivative contract established between two parties who want to execute a transaction during a particular time period. These products are traded over the counter, not on the exchange. Individual investors rarely trade contracts. In short, this market is dominated by financial institutions and investment companies.
The International Swaps and Derivatives Association has created standardized contracts to streamline the consensus process and provide the structure. This organization was founded in 1985 by the private derivatives market to make it safer and more efficient for participants. It provides documentation that helps mitigate the risks associated with these financial instruments while increasing transparency.
One of these documents is the ISDA Master Swap Agreement. This is a contract that standardizes the agreement between two parties who agree to exchange swaps. These transactions are performed on over-the-counter derivatives rather than on exchanges, so they are more likely to default. The contract outlines the following information:
- Two parties participating in a transaction
- Contract terms
- Default event
- Termination details
- Other legality of transactions
This document has been standardized as a way to assist parties in agreement with each other, especially when operating in different jurisdictions. It also provides provisions for transactions involving different currencies.
Signing a master swap agreement allows the same party to make additional transactions in the future because it can be based on the original agreement.
The ISDA Master Swap Agreement is an internationally recognized standardized agreement, but the parties do not need to enter into this agreement to carry out a swap transaction. This means that the two parties can first enter into this type of derivative contract without signing the contract.
If they decide to pursue this route, the parties agree to the Vanilla ISDA Agreement provided without special addendum. Signing this type of contract does not provide any special protection. However, you must sign a confirmation that you are committed to negotiating an ISDA agreement within 30 to 90 days.
History of master swap contracts
The Master Swap Agreement, established in 1992, is known as the Multi-Currency-Cross-Border Agreement. Updated in 2002 to include new provisions such as damages, interest and compensation. The new version fixes it by shortening the grace period outlined in the previous contract.
Both versions are still commonly used by members of ISDA. The 2002 edition is long and is known to be 28 pages long.
ISDA members can get contracts and related materials for $ 150, and non-members pay $ 350.
Master swap contract provisions
Both the 1992 and 2002 master swap agreements are divided into 14 sections. These segments help determine and outline the basis of the relationship between each party.
These sections provide provisions for specific situations, such as:
- What if at least one of the parties involved declares bankruptcy?
- What happens when these derivative contracts are terminated or terminated?
As mentioned above, the 2002 version of the contract has been renewed with eight default events and five new terms outlining the termination of the contract if one or both parties default the contract.
ISDA also offers a special schedule in case stakeholders want to change the standard terms of a master swap agreement. This is negotiated by each party and can take up to 3 months. The length of the negotiation depends on how complex the special terms of the contract are and the willingness of each party to cooperate.