The ISDA Master Agreement, first introduced in 1992, is a widely-used document in the derivatives industry. It sets out the legal framework for over-the-counter (OTC) derivatives transactions between two parties. The agreement is created by the International Swaps and Derivatives Association (ISDA), a trade organization that represents participants in the derivatives market.
In 2002, ISDA updated the Master Agreement to address various issues and concerns that had arisen in the derivatives market. The updated agreement, known as the 2002 ISDA Master Agreement, introduced several new provisions and improvements over the 1992 version.
One of the key changes in the 2002 agreement was the introduction of the “single agreement” concept. This means that all transactions between the parties under the agreement are treated as a single agreement, rather than a series of separate transactions. This simplifies the process of calculating and settling net payments between the parties.
Another significant change was the inclusion of provisions for close-out netting. This allows the parties to calculate and settle net payments in the event of a default or termination of the agreement. Close-out netting helps to reduce counterparty risk and promote financial stability in the derivatives market.
The 2002 ISDA Master Agreement also introduced new provisions for credit and collateral support. These provisions provide a framework for the parties to manage credit risk and collateralize their obligations under the agreement.
Overall, the 2002 ISDA Master Agreement is an important update to the original 1992 version. It introduces several new provisions that help to reduce counterparty risk and promote financial stability in the derivatives market. If you are involved in derivatives trading, it is important to understand the provisions of both the 1992 and 2002 ISDA Master Agreements.