Mastering the ISDA Master Agreements: A Practical Guide for Negotiation

817 Pages·2010·150.85 MB·English

by  Paul Harding

A practical guide
for negotiation
Mastering the ISDA®
Master Agreements
(1992 and 2002)
A practical guide for negotiation
third edition
PAUL C. HARDING
With a chapter on legal issues by
Simon J. Leifer and Christian A. Johnson
Financial Times
Prentice Hall
is an imprint of
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First published in Great Britain in 2004
This edition published 2010
© Pearson Education Limited 2004, 2010
The right of Paul Harding to be identified as author of this work has been asserted
by him in accordance with the Copyright, Designs and Patents Act 1988.
ISBN: 978-0-273-72520-6
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Harding, Paul C.
Mastering the ISDA master agreements (1992 and 2002): a practical
guide for negotiation I Paul Harding. -- 3rd ed.
p. cm.
Includes index.
ISBN 978-0-273-72520-6 (pbk.)
1. Derivative securities. 2. Negotiation in business. I. Title.
HG6024.A3H367 2010
332.64'57--dc22
2010009681
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About the author
Paul Harding is a graduate of London University and has worked in several UK
and foreign banks in London in credit, marketing and documentation roles.
Since 1990 he has been involved with OTC derivatives documentation and was
a well-known negotiator in the City of London with Barclays Capital Securities
Limited and Hill Samuel Bank Limited where he was Head of Treasury
Documentation.
In February 1997 he founded Derivatives Documentation Limited, a
derivatives consultancy and project management company based in the City
of London and providing negotiation, recruitment and in-house and online
training services in OTC derivatives documentation. Its clients include many
of the world's leading banks.
In November 2001 Paul's book, Mastering the ISDA Master Agreement
was published by Financial Times-Prentice Hall. This was followed by
his Mastering Collateral Management and Documentation in conjunction with
Christian Johnson, also in this series, which was published in November
2002.
In 2003 Mastering the ISDA Master Agreement went into a second edition
and was retitled and much expanded as Mastering the ISDA Master Agreements
(1992 and 2002). Given the passage of time and market developments since
2003, the opportunity has been taken to publish this third edition.
Paul has also written books on ISDA® documentation for credit derivatives
and on repos and their master agreement documentation.
•
Disclaimer
This book is intended to provide an informational and illustrative overview
of its subject mainly to non-lawyers and is not at all intended to provide
legal or tax advice in respect of any particular situation, contractual rela
tionship or contemplated transaction. The laws and regulations applicable
to over the counter derivatives transactions are complex and subject to
frequent change. Users of this book should consult their legal and other
advisers as they deem appropriate in the preparation and negotiation of over
the counter derivatives documentation.
The authors of this book regard the examples given herein as illustrative
only and assume no responsibility for any use to which ISDA standard docu
®
mentation or any definition or provision set forth in this book may be put .
•
Contents
About the author iii
Disclaimer iv
Acknowledgements viii
Author's foreword x
1 Introduction 1
What are derivatives? 2
Differences between the OTC and exchange-traded 2
derivatives market
Main products 4
Size of the global OTC derivatives market 9
How a deal is done from start to finish 9
The people involved 13
The documentation process 15
2 The evolution of the ISDA Master Agreement 17
How ISDA documentation has evolved 18
Inefficient documentation of trades in the market's early days 18
The ISDA documentation architecture 19
The ISDA Master Agreement 24
3 The 1992 ISDA Master Agreement 29
Section by section analysis of the 1992 ISDA Master Agreement 31
Glossary of most terms in Section 14 131
4 The 2002 ISDA Master Agreement 165
Evolution of the 2002 ISDA Master Agreement 167
Section by section analysis of the 2002 ISDA Master Agreement 169
Glossary of most terms in Section 14 319
Analysis of the Schedule 349
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Contents
What did not make it into the 2002 ISDA Master Agreement 380
Implementation of the 2002 ISDA Master Agreement 381
5 Legal issues relating to the ISDA Master Agreement from the
European and US perspectives 383
European perspective by Simon]. Leifer 385
Gaming/wagering 385
Legal capacity 386
Credit derivatives 389
Authority 394
Suitability 395
Financial Services and Markets Act 2000 396
Enforceability of close-out netting and set-off 397
Cross-border netting on insolvency 399
Markets in Financial Instruments Directive (MiFID) 400
ISDA collective legal opinions 401
Automatic Early Termination 402
Credit Support 402
Third-party rights 404
US perspective by Christian A. Johnson 404
Enforcement of New York choice of law 405
US bankruptcy and banking insolvency law 406
Non-New York Head Office of a US counterparty 412
The Commodity Exchange Act (1974) and the Commodity 413
Futures Modernization Act (2000)
Gaming and bucket shop laws 419
6 Credit issues relating to the ISDA Master Agreement 421
Addition of Specified Entities 422
Specified Indebtedness 423
Downgrade from Cross Default to cross acceleration 425
Threshold Amount 426
Credit Event Upon Merger 426
Additional Termination Events 427
Set-Off 427
Transfers 428
Political risk 429
Other credit issues 429
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Pre-signing trade policies 430
Contents
Categories of risk in the Agreement 430
Using the ISDA Master Agreement to enhance credit protection 431
The "vanilla ISDA" 432
7 Operational issues 435
Confirmations 436
Payments 437
Deliveries 439
Early termination or close-out 440
Administrative matters 441
8 Negotiation of a 2002 ISDA Master Agreement Schedule 443
Sample Schedule 445
Variants and implications of each provision 459
Other provisions commonly seen in the market and 590
their implications
Part 6 - FX transactions and currency options 627
9 Special provisions for special entities and those sought by 651
US counterparties
Building societies 652
Investment funds 656
Hedge funds 665
Pension funds 670
Insurance companies 672
Sovereign entities 675
Supranationals 679
Covered bonds 681
Individuals 683
Loan linked ISDA Schedules 684
US Schedule provisions 699
1O The credit crunch 713
Origins 714
What happened? 714
The current position 716
Possible future developments 717
Annexes 719
Bibliography 793
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Index 797
Acknowledgements
I should like to thank my wife, Sheila, for all her encouragement in getting
this book completed to time. She taught me the simple lesson that if you
wanted to write a book you needed to sit down and actually write it and
not just talk about it. Sheila knew when to urge me to press on and when
to stand back and I thank her for all her patience and sacrifices over the past
few months.
My grateful thanks are due to my daughter, Abby, for much excellent
emergency typing and technical assistance.
I would like to thank all those who kindly read first proofs and made
comments, in particular:
Colin Corrodus, Global Head of the Legal Documentation Unit, Barclays
Capital
Wendy Rogers, Head of GFM Documentation, The Royal Bank of
Scotland plc
Wilfried Schutte, Senior Legal Counsel, DZ Bank AG
Keith Spiller, Managing Director, Traded Products Legal, UBS
Investment Bank.
I should like to thank the editorial staff at Financial Times-Prentice
Hall for all their excellent editing and support. Special thanks are due to
Christopher Cudmore, Linda Dhondy and Martina O'Sullivan.
Special thanks are also due to Nicholas Stevens for useful comments on
Confirmations in Chapter 1 and to Stewart Moffat of Nationwide Building
Society for his useful revisions to the text of the Building Societies section
of Chapter 9.
Wendy Rogers of The Royal Bank of Scotland Plc in London provided
some useful factual input in Chapter 10. My thanks to her.
Special thanks are also due to Douwe Kalsbeek, a tax specialist at ING
Bank N.V. in Amsterdam who kindly reviewed all the tax related sections
of this book.
Last but not least it has been a real pleasure working again with Simon
Leifer who kindly revised his excellent distillation on English law relating to
derivatives in Chapter 5 and Christian Johnson who wrote knowledgeably and
•
Acknowledgements
clearly on US law in the same chapter and rewrote the section on US Schedule
provisions in Chapter 8. Christian also supplied part of the commentary
on the US Payee Tax Representations in Part 2(b) of the 2002 Agreement
Schedule in Chapter 4.
I could not have worked with two nicer people throughout.
II