isda presentation

International Swaps and Derivatives Association, Inc.

UNDERSTANDING THE NEW ISDA

DOCUMENTATION CONFERENCE

ISDA 2002 MASTER AGREEMENT

ISDA Code of 1986 Code - Interest Rate Swap Agreement Cap, Collar Option RevisedFormed SWAPS of SWAPS - Interest Rate and Currency and Floor Addendum Definitions

(Standard Exchange Agreement Addendum (1991Wording, - Interest Rate and Currency Definitions)Assumptions Exchange Definitionsand Provisionsfor Swaps)

- Master Agreement - User’s Guide to 1992 - Credit Support Annex - User’s Guide to (Multicurrency-Cross Master Agreements (New York law) Credit Support Border) & (Local - OTC Bond Option - OTC Single Share Annex (New York law)Currency-Single Confirmation (Long Form) Option (Physical - Credit Support AnnexJurisdiction) - Commodity Derivatives Settlement) Confirmation (Transfer-English law)

- U.S. Municipal Definitions (Long Form) - Credit Support DeedCounterparty - Japanese translation of - Equity Option Definitions (Security Interest-EnglishDefinitions 1992 Master Agreement law)and Schedule - Standard Terms and

- FX and Currency Conditions for EscrowOption Definitions Float Transactions

- OTC Equity Index - Credit Support Annex Option Confirmation (Security Interest Subject to (Long Form) Japanese Law)

19841984 19851985 19861986 19871987 19891989 19901990 19911991

19921992 19931993 19941994 19951995

ISDA ® 2003

- 1996 Equity Derivatives Definitions- Credit Support Annex

(Japanese law)- User’s Guide to Credit Support

Annex (Japanese law)- Chinese Character Translation

(Traditional and Simplified) of User’s Guide to 1992 Master Agreements

- 1996 Representation Regarding Relationship between Parties

- ISDA/BBAIRS Bridge - ISDA/FRABBA Bridge

- 1997 Government Bond Option Definitions

- EMU Continuity Provision

- 1997 Bullion Definitions (long form and short form)

- OTC Credit Swap Confirmation

- 1998 FX and Currency Option Definitions

- 1998 Supplement to 1991 Definitions

- 1998 Euro Definitions

- EMU Protocol- EMU Guidebook- Guidelines for

Collateral Practitioners

- User’s Guide to Credit Support Documents under English Law

- User’s Guide to 1998 FX and Currency Option Definitions

- 1999 Credit Derivatives Definitions

- Y2K Review- 1999 Collateral Review

1996 1996 1997 1998 1997 1998 19991999

- 2000 Definitions- Supplement to 1993

Commodity Derivatives Definitions

- Revised Annex A to 1998 FX and Currency Option Definitions

- EMU Protocol (Greece)

2000 2000 20012001

- Restructuring Supplement to 1999 Credit Derivatives Definitions- 2001 Margin Provisions- User’s Guide to 2001 Margin Provisions- 2001 Credit Support Protocol- 2001 Euro Protocol- Form of Amendment to 1992 Master Agreements- U.S. Payee Tax Representations- Supplement to 1999 Credit Derivatives Definitions Relating to Convertible, Exchangeable or

Accreting Obligations- Supplement to 1999 Credit Derivatives Definitions Relating to Successor and Credit Events- 2001 Cross-Agreement Bridge- Chinese Character Translation of 1992 Master Agreement

ISDA ® 2003

- 2002 Energy Agreement Bridge- 2002 Equity Derivatives Definitions- 2002 Master Agreement

2003- 2003 Credit Derivatives Definitions

2002 and 20032002 and 2003

ISDA ® 2003

20022002

2002 Master Agreement

Published on 9th January, 2003

Incorporates and refines some of the standard amendments published in October 2001 as a result of ISDA’s Strategic Documentation Review

Additional changes reflect developments in market practice, legislation and litigation

Structure and fundamental protections unchanged

ISDA Agreement Structure (2003)

2002 Master AgreementGoverns legal and credit relationship between the parties

Includes representations, events of default/termination events, covenants

Incorporates Confirmations

Schedule makes elections and changes to standard provisions

Confirmations (short form)Incorporate DefinitionsSpecify economic terms of each TransactionInclude Transaction-specific modifications

1995 Credit Support Deed (Security Interest-English law)

Definitions: for use in documentingTransactions

2003 Credit Derivatives Definitions2002 Equity Derivatives Definitions2000 Definitions (plus annex)1999 Credit Derivatives Definitions (plus supplements)1998 Euro Definitions 1998 FX and Currency Option Definitions (plus revised Annex A)1997 Bullion Definitions 1997 Government Bond Option Definitions 1993 Commodity Derivatives Definitions (as amended by 2000 Supplement)

Credit Support Documents:offering protection againstcredit risk

2001 ISDA Margin Supplement (incorporating 2001 ISDA Margin Provisions)1995 Credit Support Annex (Transfer-English law) 1994 Credit Support Annex (New York law)

Confirmations (long form)

1995 Credit Support Annex (Japanese law)

Bridges2002 Energy Agreement Bridge2001 Cross-Agreement Bridge1996 FRABBA Bridge 1996 BBAIRS Bridge

ISDA ® 2003

Master Agreements

Master Agreement

Confirmation(e.g. interest rate swap)

Confirmation(e.g. credit default swap)

Confirmation(e.g. equity option)

ISDA ® 2003

Basic ISDA Agreement Structure

2002 Master Agreement plus Schedule

Governs legal and credit relationship of partiesIncludes representations, events of default and covenantsIncorporates ConfirmationsSchedule makes elections and changes to standard provisions

Short Form ConfirmationsIncorporate DefinitionsSpecify economic terms of each TransactionInclude Transaction-specific modifications

DefinitionsContain standard terms and definitions for documenting particular types of Transactions

Long Form ConfirmationsSpecify economic terms of each TransactionInclude Transaction-specific modifications

Credit Support DocumentsOffering protection against credit risk

Preserved:

A sunny side: Sections 1 to 4

A dark side: Sections 5 and 6

A back side: Sections 7 to 13

A far side

Preserved:3 PILLARS OF THE ISDA MASTER AGREEMENT:

SINGLE AGREEMENT FLAWED ASSET/CONDITIONALITY

CLOSE-OUT NETTING

Summary of Principal Changes

Events of Default tightened

Close-out Amount in; Market Quotation, Loss, First Method out

Set-off clause introduced

Amendments to Termination Events (including amendments to Illegality and introduction of Force Majeure Event)

Section 10(a) clarified

Jurisdiction clause updated

Interest and compensation provisions consolidated and refined

Preamble

“dated as of”

“Transactions”

“Confirmations”

Section 1 - Interpretation

Definitions

Inconsistency

Single Agreement

Conditions Precedent

Section 2(a)(iii) - conditions precedent

Standard conditions precedent unchanged

In 2002 Agreement, any additional condition precedent needs to be “specified in this Agreement to be a condition precedent for the purpose of this Section 2(a)(iii)”

Section 2(c) Payment Netting

PartyA

PartyA Net: $75

PartyB

PartyB

Gross: $100

Gross: $25

Note: payment netting applies to payments...on the same datein the same currencyin respect of the same Transaction UNLESS parties elect “Multiple Transaction Payment Netting” to apply (Part 4(i) of Schedule)

Section 3 - Representations

Basic RepresentationsAbsence of Certain EventsAbsence of Litigation (Specified Entities replace Affiliates)Accuracy of Specified InformationTax RepresentationsNo Agency (elective)Additional Representations (specified in Schedule/Confirmation). See Schedule for “Relationship Between Parties” representation

Section 4 - Agreements

Furnish Specified Information

Maintain Authorisations

Comply With Laws

Tax Agreement

Payment of Stamp Tax

Section 5(a) - Events of Default

Failure to Pay or Deliver (Section 5(a)(i))

applies to each party

Event of Default will occur if:

− a party has failed to pay/deliver

− the other party gives notice of such failure

− such failure is not remedied within one Local Business Day/Local Delivery Day after notice

Local Delivery Day


Breach of Agreement; Repudiation of Agreement(Section 5(a)(ii))


new coverage for repudiation of the Agreement, a Confirmation or a Transaction

30 day grace period (after notice) applies to Breach of Agreement


Credit Support Default (Section 5(a)(iii))

applies to each party and any Credit Support Provider(s)

new coverage for failure of security interest

Misrepresentation (Section 5(a)(iv))



Default Under Specified Transaction (Section 5(a)(v))

applies to each party, any Credit Support Provider(s) and any Specified Entities“Specified Transaction” definition includes variety of transactions under other agreements between:

− each party− a party and the other party’s Credit Support Provider or

Specified Entity− one party’s Credit Support Provider or Specified Entity

and the other party’s Credit Support Provider or Specified Entity

Specified Entities

In Part 1(a) of the Schedule, the parties may elect whether any entities will be Specified Entities for the purposes of:

Section 5(a)(v) (Default Under Specified Transaction)

Section 5(a)(vi) (Cross-Default)

Section 5(a)(vii) (Bankruptcy)

Section 5(b)(v) (Credit Event Upon Merger)


definition updated and expanded in 2002 Agreement

only triggered by delivery failure if such failure results in acceleration of all transactions outstanding under the documentation applicable to the Specified Transaction

Default Under Specified Transaction (Section 5(a)(v)) - CONT’D


Cross-Default (Section 5(a)(vi))

parties elect in Part 1(c) of Schedule whether Section 5(a)(vi) will apply to a party and any Credit Support Provider(s) and Specified Entities

“Specified Indebtedness” is defined in Section 14 as “any obligation …in respect of borrowed money”. Parties can amend definition in Part 1(c) of Schedule

Threshold Amount to be specified in Part 1(c) of Schedule

Clauses (1) and (2) are now aggregated


Think through amendments to Section 5(a)(vi) carefully:

Section 5(a)(vi) will probably continue commonly to be amended

Section 5(a)(vi) gives the best default event protection a creditor can obtain vis à vis other creditors

But it is a double-edged sword


Bankruptcy (Section 5(a)(vii))

applies to each party, any Credit Support Provider(s) and any Specified Entities

shortened grace periods

no grace period where proceedings instituted, or petition presented by the regulator with primary jurisdiction over the party


Merger Without Assumption (Section 5(a)(viii))


now covers broader range of merger events

Section 5(b) - Termination Events

Illegality (Section 5(b)(i))


Force Majeure Event (Section 5(b)(ii))


Tax Event (Section 5(b)(iii))


Section 5(b) - Termination Events

Tax Event Upon Merger (Section 5(b)(iv))


now covers broader range of merger events

Credit Event Upon Merger (Section 5(b)(v))

parties elect in Part 1(d) of the Schedule whether Section 5(b)(v) will apply to a party, any Credit Support Provider(s) and any Specified Entities

now covers broader range of merger events and has lower thresholds

Additional Termination Events (Section 5(b)(vi))

Illegality and Force Majeure Event

How has Illegality changed?

What is Force Majeure Event?

Anticipatory nature

Objectives

Deferral of obligations (Section 5(d))

Hierarchy of Events (Section 5(c))

Illegality and Force Majeure Event

Limitations:

only available after giving effect to other provisions

must try to overcome force majeure

Tax

No change, except:

Tax Event Upon Merger broadened

standard US payee tax representations included in Schedule

Early Termination - HowEarly Termination - How

ReasonReason

Events of DefaultBankruptcyOther

Termination EventIllegalityForce Majeure EventTax Event Upon MergerTax EventCredit Event Upon MergerAdditional Termination Event

2002 Master Agreement Reference:Sections 6(a) & 6(b)

Who may terminateWho may terminate

Non-defaulting Party or Automatic*Non-defaulting Party

typically either partytypically either partyBurdened PartyAffected PartyNon-affected PartyNon-affected Party or either party (if there are two Affected Parties)

*only applies if elected in Schedule

Event of Default

Credit Event Upon Merger

Illegality/Force Majeure Event

Additional Termination Event

Other Termination Events

Early Termination - EffectEarly Termination - Effect

all Transactions terminated

all Transactions terminated

selective termination ofAffected Transactions

all Transactions terminated(presumption)

all Affected Transactions terminated

2002 Master Agreement Reference:Sections 6(a) & 6(b)

Section 6(a) - Right to Terminate Following Event of Default

Parties elect in Part 1(e) of the Schedule whether Automatic Early Termination will apply to a party

Effect of Automatic Early Termination

When should it apply?

Early Termination -Illegality and Force Majeure Event

Rights of termination typically granted to either party

Rights of termination typically only exercisable after expiration of a Waiting Period

Right to terminate less than all Affected Transactions

Transfer to avoid Termination Event no longer applies to Illegality; does not apply to Force Majeure Event

Section 6(e) -Payments on Early Termination

Early Termination Amount:Events of Default:

sum of the Close-out Amount or Close-out Amounts determined by the Non-defaulting Party

plus Unpaid Amounts owed to the Non-defaulting Party on or before the Early Termination Date

less Unpaid Amounts owed to the Defaulting Party on or before the Early Termination Date

Close-out Amount

Single valuation measure

Replaces choice between Market Quotation and Loss

Designed to:

overcome perceived difficulties associated with precise procedures of Market Quotation in certain market conditions; and

provide more guidance and objectivity than Loss

Close-out Amount

Involves a calculation by a Determining Party of how much it would cost it (or how much it would be paid) to replace, or provide the economic equivalent of (a) the material terms of the Terminated Transaction(s), including the payments and deliveries by the parties under Section 2(a)(i) that would, but for the occurrence of the Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in Section 2(a)(iii)) and (b) the option rights of the parties in respect of the Terminated Transaction(s)

Close-out Amount

Determining Party must:

act in good faith

use commercially reasonable procedures

in order to obtain a commercially reasonable result

Close-out Amount

May be determined for an individual Terminated Transaction or a group of Terminated Transactions (so long as, in aggregate, a Close-out Amount or Close-out Amounts is/are determined for all Terminated Transactions)

Determined as of the Early Termination Date or, if that would not be commercially reasonable, as of such later date or dates as would be commercially reasonable

Close-out Amount

Definition includes non-exhaustive list of information that may be taken into account, including:

quotations (firm or indicative) from one or more third parties (need not be “leading dealers”) that may take into account the Determining Party’s creditworthiness and the terms of relevant documentation between it and the third party

other external market data - rates, prices, yields, yield curves, volatilities, spreads, correlations, etc.

in certain circumstances, information of the same types available from internal sources

Close-out Amount

But, Determining Party will consider quotations or other external market data unless it reasonably believes in good faith that quotations or relevant market data are not readily available or would produce a result that would not satisfy the standards set forth in the definition

Hedging costs: losses or costs incurred in (or gain resulting from) terminating or re-establishing a hedge may be considered by the Determining Party so long as there is no duplication of amounts otherwise calculated pursuant to the definition, and so long as it is commercially reasonable to do so

Close-out Amount

Commercially reasonable procedures may include:

subject to certain qualifications, application to certain types of information (not third party quotations) of internal pricing or valuation models

application of different valuation methods to different Terminated Transactions or groups of Terminated Transactions depending on their type, complexity, size or number


Early Termination Amount:Termination Events - One Affected Party:

as for Events of Default, but references to Non-defaulting Party read as references to Non-affected Party


Early Termination Amount:Termination Events - Two Affected Parties:

one-half of difference between sum of Close-out Amount or Close-out Amounts determined by each Affected Party

plus Unpaid Amounts owed to the party determining the higher amount

less Unpaid Amounts owed to the party determining the lower amount


Early Termination Amount:Termination Events - Mid-Market Events:

Illegality/Force Majeure Event

Early Termination Amount determined as above (depending on whether there is one Affected Party or two Affected Parties), but, for the purpose of determining a Close-out Amount or Close-out Amounts, mid-market quotations/values used


Party that is out-of-the-money on a net basis has to pay other party, even if other party is a Defaulting Party

No longer an election of “payment method”

The “Second Method” or “full two-way payments” approach always applies

Early Termination Amount

Section 6(e)(iv):

failure to pay Early Termination Amount due to Illegality or Force Majeure Event does not constitute an Event of Default under Section 5(a)(i) or 5(a)(iii)(1)

if all outstanding Transactions subsequently terminated, treated as an Unpaid Amount

Section 6(f) - Set-Off

Early Termination Amount subject to Section 6(f)Section 6(f) introduces a contractual set-off clause intothe 2002 Agreement:

based on “Basic Set-off Provision” contained in the User’s Guide to the 1992 ISDA Master Agreementsnot cross-affiliateenforceability of clause not considered in ISDA netting opinions

The Backside

Section 7 - TransferSection 8 - Contractual CurrencySection 9 - MiscellaneousSection 10 - Offices; Multibranch PartiesSection 11 - ExpensesSection 12 - NoticesSection 13 - Governing Law and Jurisdiction

Section 9(h) - Interest and Compensation

Prior to Early Termination

Defaulted Payments

Defaulted Deliveries

Deferred Payments

Deferred Deliveries

Following Early Termination

Unpaid Amounts

Early Termination Amounts

Interest and Compensation - Examples

The following examples illustrate how, on early termination, interest is to be taken into account in the determination of an Unpaid Amount

Section 9(h)(ii)(1) applies for the purpose of determining an Unpaid Amount:

interest accrues from (and including) the date the relevant obligation was (or would have been but for Section 2(a)(iii) or 5(d)) required to have been performed to (but excluding) the relevant Early Termination Date, at the Applicable Close-out Rate

Monday Tuesday Friday Monday MondayFebruary 3 February 4 February 7 February 10 February 17

Swap Party A gives Party B’s Party A EarlyPayment Date: notice of failure to pay designates TerminationParty B failure to on Feb. 3 Feb. 17 Date. owes $150,000 Party B. becomes as the Early and fails to Event of Termination to pay. Default. Date.

Example 1


Under Section 9(h)(ii)(1), interest accrues from (and including) February 3 to (but excluding) February 17 at Applicable Close-out Rate

Clause (a)(i) of Applicable Close-out Rate definition:

“in respect of obligations payable or deliverable…by a Defaulting Party, the Default Rate”


Monday Wednesday Thursday Monday ThursdayFebruary 3 February 5 February 13 February 17 February 20

Force Majeure Swap Last day of Party A EarlyEvent occurs. Payment Date: applicable designates Termination

Party B owes Waiting Period Feb. 20 Date. $150,000 (Force Majeure as the Early and does not Event continues). Termination pay due to Date. Force MajeureEvent.

Example 2


Under Section 9(h)(ii)(1), interest accrues from (and including)February 5 to (but excluding) February 20 at Applicable Close-out Rate

Clauses (a)(iii) and (a)(iv) of Applicable Close-out Rate definition:

“(iii) in respect of obligations deferred pursuant to Section 5(d), if there is no Defaulting Party and for so long as the deferral period continues, the Applicable Deferral Rate; and

(iv) in all other cases following the occurrence of a Termination Event (except where interest accrues pursuant to clause (iii) above), the Applicable Deferral Rate”


Clause (b) of Applicable Deferral Rate definition applies for solong as the deferral period continues (February 5 to February 13):

rate offered to prime banks for overnight deposits in the applicable currency

Clause (c) of Applicable Deferral Rate definition applies for the rest of the period up to the Early Termination Date:

rate equal to the arithmetic mean of (i) the rate offered to thepayer for overnight deposits in the applicable currency and (ii)the rate equal to the relevant payee’s cost of funds (borrowing rate)


Multibranch

Party A(Frankfurt)

Party B(Paris Branch)

Party B(London

Head Office)Swap 1

Swap 2

Section 10 - Offices; Multibranch Parties

Refined in 2002 Agreement:

more sophisticated treatment of branches

clarification of Section 10(a) (remains elective)

Section 5(e) - extension of Illegality/Force Majeure Event provisions

Section 12 - Notices

Different methods of giving notice or other communication

Notices under Sections 5 and 6

New technology

Section 13 - Governing Law and Jurisdiction

Submission to jurisdiction of the English courts now generally non-exclusive

Submission to jurisdiction of New York courts unchanged

Section 14 - Definitions

Consolidated

Helpful definitions included, e.g.:

Early Termination Amount

General Business Day

Non-affected Party

Termination Currency

Schedule

US payee tax representations

Relationship Between Parties representation

Recording of Conversations

Signature block

2001 Cross-Agreement Bridge

Effectively turns an ISDA Master Agreement into a “master master” agreement

Designed for inclusion in the Schedule to a 1992 Agreement, but easily adapted for use with the 2002 Agreement

If a “Bridging Event” occurs, all transactions under designated “Bridged Agreements” are closed out

Resulting net close-out amounts under the Bridged Agreements are incorporated into the close-out calculation under Section 6(e) of the ISDA Master Agreement

ISDA Netting Opinions 2002ISDA Netting Opinions 2002

15. Hungary16.16. IndonesiaIndonesia17.17. IrelandIreland18.18. ItalyItaly1919 JapanJapan20.20. LuxembourgLuxembourg21.21. MalaysiaMalaysia22.22. MexicoMexico23.23. Netherlands AntillesNetherlands Antilles24.24. New ZealandNew Zealand25.25. NorwayNorway26.26. PhilippinesPhilippines27.27. PortugalPortugal28.28. ScotlandScotland

29.29. SingaporeSingapore30.30. South AfricaSouth Africa31.31. South KoreaSouth Korea32.32. SpainSpain33.33. SwedenSweden34.34. SwitzerlandSwitzerland35.35. TaiwanTaiwan36.36. ThailandThailand37.37. TurkeyTurkey38. The Netherlands39. United States

1. Australia2. Austria3. Bahamas4. Belgium5. Bermuda6. B.V.I.7. Canada8. Cayman Islands9. Denmark10. England11. Finland12. France13. Germany14. Hong Kong

isda presentation

Documents

covers broader

credit support

chinese character

force majeure

deferral period

external market

credit support

early termination