Mastering the ISDA Master Agreements (1992 and 2002): A Practical Guide for Negotiation PDF
Preview Mastering the ISDA Master Agreements (1992 and 2002): A Practical Guide for Negotiation
mastering mastering m mastering a A practical guide tHe isDa® master tHe isDa® master s tHe isDa® master t for negotiation e agreements agreements r agreements i n mastering (1992 and 2002) (1992 and 2002) g (1992 and 2002) third edition t A practical guide for negotiation H A practical guide for negotiation A practical guide for negotiation e tHe isDa® master The ISDA® Master Agreements are complex Paul Harding is a graduate of London University i documents. It can take up to two years to become s and has worked in several UK and foreign D proficient in negotiating and understanding banks in London in credit, marketing and Published by the International Swaps and Derivatives Association, the 1992 a their key elements. Mastering the ISDA® Master documentation roles. Since 1990 he has been and 2002 ISDA® Master Agreements are the main contracts used in the ® agreements Agreements provides a detailed overview of the involved with OTC derivatives documentation over-the-counter global derivatives market. Mastering the ISDA® Master legal, credit and operational issues inherent in the and was a well-known negotiator in the City of Agreements provides a practical, clear and useful guide to help understand m Agreements. London with Barclays Capital Securities Limited a and negotiate these Master Agreements. and Hill Samuel Bank Limited where he was s The book includes: head of Treasury Documentation. This revised and updated edition is an essential handbook for anyone t (1992 and 2002) • The evolution of ISDA® documentation e including general and product definitions and In February 1997 he founded Derivatives involved in negotiating agreements, from financial institutions through to r confirmations Documentation Limited (www.derivsdocu.com), fund managers, law firms, credit officers, regulators and business students. a • A clear and detailed commentary on the a derivatives consultancy and project g individual sections and provisions of the 1992 management company based in the City of This new edition includes: r London and providing negotiation, recruitment • An updated and comprehensive guide to the ISDA and 2002 ISDA® Master Agreements • Increased focus on the 2002 ISDA® Master Agreement Schedule e and in-house and on-line training services in e • The main legal issues surrounding the Master Agreements derivatives documentation. Its clients include • Expanded sections on hedge fund and loan-linked Schedules m Agreement and OTC derivatives from UK and many of the world’s leading banks. • The introduction of covered bonds e • Includes simplified glossaries of terms used in the US legal perspectives • The effect of the credit crunch, the role of derivatives and how this has n • Special Schedule terms including those for Paul is also the author of Mastering Collateral Agreements building societies, insurance companies, affected the market t Management and Documentation, written in s hedge funds and sovereign entities conjunction with Christian Johnson, which was • Provisions seen in US Schedules which often published in November 2002. third face non-US negotiators • The background to the credit crunch, the edition Paul has also written books on ISDA® effect on the OTC derivatives market and documentation for credit derivatives and some suggestions about possible changes to on repos and their master agreement H the market documentation. A R • Annexes including reproductions of the ISDA® D Master Agreements in full I N G FINANCE third edition Visit our website at www.pearson-books.com Visit our website at www.pearson-books.com PAul c. HArding CVR_HARD5206_03_SE_CVR.indd 1 31/3/10 15:15:56 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 A01_HARD5206_03_SE_FM.indd 1 31/03/2010 08:39 PEARSON EDUCATION LIMITED Edinburgh Gate Harlow CM20 2JE Tel: +44 (0)1279 623623 Fax: +44 (0)1279 431059 Website: www.pearsoned.co.uk 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 / 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 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publishers. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. Pearson Education is not responsible for the content of third party internet sites. 10 9 8 7 6 5 4 3 2 1 14 13 12 11 10 Typeset in 11.5pt Garamond by 30 Printed by Ashford Colour Press Ltd., Gosport A01_HARD5206_03_SE_FM.indd 2 31/03/2010 08:39 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. iii A01_HARD5206_03_SE_FM.indd 3 31/03/2010 08:39 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. iv A01_HARD5206_03_SE_FM.indd 4 31/03/2010 08:39 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 v A01_HARD5206_03_SE_FM.indd 5 01/04/2010 15:41 Contents What did not make it into the 2002 ISDA Master Agreement 380 Implementation of the 2002 ISDA Master Agreement 381 5 LegalissuesrelatingtotheISDAMasterAgreementfromthe EuropeanandUSperspectives 383 European perspective by Simon J. 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 CreditissuesrelatingtotheISDAMasterAgreement 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 Pre-signing trade policies 430 vi A01_HARD5206_03_SE_FM.indd 6 31/03/2010 08:39 Contents Categories of risk in the Agreement 430 Using the ISDA Master Agreement to enhance credit protection 431 The “vanilla ISDA” 432 7 Operationalissues 435 Confirmations 436 Payments 437 Deliveries 439 Early termination or close-out 440 Administrative matters 441 8 Negotiationofa2002ISDAMasterAgreementSchedule 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 Specialprovisionsforspecialentitiesandthosesoughtby 651 UScounterparties 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 10 Thecreditcrunch 713 Origins 714 What happened? 714 The current position 716 Possible future developments 717 Annexes 719 Bibliography 793 Index 797 vii A01_HARD5206_03_SE_FM.indd 7 31/03/2010 08:39 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 Schütte, 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 viii A01_HARD5206_03_SE_FM.indd 8 31/03/2010 08:39 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. ix A01_HARD5206_03_SE_FM.indd 9 31/03/2010 08:39
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