Over-the-counter (OTC) transactions such as interest rate swaps, credit default swaps (CDS) and total return swaps have traditionally been entered into bilaterally, between two parties, using documentation published by ISDA®. However, in light of the financial crisis, which OTC derivatives were blamed for exacerbating, regulators in the US and globally have begun to move much of the OTC derivatives market onto exchanges and into clearinghouses (see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Clearing and Exchange Trading under Title VII). It would stand to reason that this tectonic shift in the way derivatives are transacted would impact the need for and use of ISDA documentation.

In practice, only those derivatives contracts that are truly "standardized" will be able to be cleared until the industry has developed adequate technology to overcome relevant operational hurdles. To date, only certain interest rate swaps and CDS must be cleared (see Legal Update, Final Clearing Determination for CDS and Interest Rate Swaps Issued by CFTC), though that represents a large segment of those markets. How much of the OTC derivatives market is ultimately moved onto exchanges and through clearinghouses, and the extent to which the use of bilateral ISDA documentation is replaced by clearing documentation, remains to be seen. But changes to the way swaps and derivatives transactions are documented have already arrived. In response, ISDA has taken a number of steps to remain relevant in the Dodd-Frank era, focusing on market solutions such as protocols and standardized clearing, execution and margin collateral segregation template documents, discussed below.

To date, however, bilateral ISDA documentation remains the dominant documentation platform for the derivatives market, most of which remains uncleared. The ISDA Master, ISDA Schedule, transaction confirmation and CSA will likely continue to play a prominent role in documenting swaps and derivatives trades even after Title VII is fully implemented. ISDA will likely release a new version of its Master Agreement that is designed to address documentational issues created by applicable regulations such as Dodd-Frank. In the meantime, ISDA has released its first Dodd-Frank Protocols to facilitate compliance with the initial wave of final, effective Title VII rules for swap dealers (SDs) and major swap participants (MSPs) (see The ISDA Dodd-Frank Protocol). Further, the ISDA clearing addendum has become the market standard document used to supplement the futures account agreements used by derivatives exchange members and clearinghouse clearing members to govern cleared and exchange-traded derivatives (see The ISDA-FIA Cleared Derivatives Addendum).

Even in the swap clearing era under Dodd-Frank and European Market Infrastructure Regulation (EMIR), parties will continue to use existing ISDA documentation for derivatives transactions that: