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 now require or will soon require that much of the OTC derivatives market be traded on exchanges and cleared by clearinghouses. It would stand to reason that this tectonic shift in the way OTC derivatives are transacted would impact the use of ISDA OTC documentation. And it has.

ISDA has changed focus to some extent, publishing documentation (see Legal Update, ISDA and FIA Publish Cleared Derivatives Addendum) and protocols (see Practice Note, the ISDA Dodd-Frank Protocols) designed to facilitate compliance with derivatives regulation both in the US and globally.

However, in practice, only those swaps contracts that are truly "standardized" may be cleared, at least until the industry has developed adequate technology to overcome relevant operational hurdles - a process that could take a decade or more. To date, only certain interest rate swaps and CDS must be cleared and exchange traded under Title VII of the Dodd-Frank Act (see Practice Note, The Dodd-Frank Act: Swap Clearing and Exchange Trading under Title VII). Though this represents a large segment of these major swaps markets, to date, bilateral ISDA documentation remains the dominant swap documentation platform, as much swap activity remains uncleared and off-exchange.

The ISDA Master Agreement (ISDA Master) and Schedule to the ISDA Master Agreement (ISDA Schedule) therefore continue to play a prominent role in documenting swaps and derivatives transactions. 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:

Because these documents continue to provide utility for the derivatives transactions of a variety of counterparties globally, from small agricultural producers to global financial institutions, Practical Law Finance is ringing in the holidays with its new Understanding the Understanding the ISDA Master Agreement and Schedule overview drafting note. This resource provides a comprehensive, user-friendly guide to navigating and understanding the ISDA Master and negotiating and drafting the ISDA Schedule. It may be read in conjunction with either the 2002 ISDA Master Agreement and Schedule or the 1992 ISDA Master Agreement and Schedule.

This resource offers the following: