ISDA - ( International Swaps and Derivatives Association)

If you are working in OTC markets, I am sure you may have heard about the term ISDA and if you not working currently and planning to work into it someday then its important for you to know . . So what it is and why its important ? ??

ISDA - ( International Swaps and Derivatives Association) is an organization formed in the year 1985 to regulate Over the counter #Derivative #markets. Its main aim is to regulate and improve transparency in the OTC trading that can generate higher liquidity and also publish guidelines that needs to be followed by all the parties in the course of events that can take in the OTC world. Over 900 financial organization are members of it in over more than 70 countries. Initially it was more focused on single currency swaps , however as time went , markets and products developed , cross currency and more products came under its jurisdiction .

To ensure the above objective is followed . ISDA has published a standard document also known as "ISDA Master Agreement" that outlines all the legal terms relating to rules that needs to be followed by the parties signing it , that makes them legally biding to it . This is a standard document and will be same for the all the parties who want to enter for trading in OTC world . There are two version of it currently . that is 1992 and 2002 version and various contractual agreement are published time to time to add on to it .

If any parties wants to agree/disagree on certain terms mentioned in ISDA standard agreement , ISDA provides template that is known SCHEDULE to ISDA, where that can be documented .

If the parties wants to explicitly agree on certain terms more on mitigating credit risk, that they can sign Credit Support Annexure , also commonly known as CSA . Here both the parties agree upon how the collateral will be exchanged based on the valuation exposure at the Fund and entity level with each other , such Minimum Transfer amount, currencies, Threshold level , rounding's, security that can be accepted and many more . ..

ISDA organization keeps on updating itself and forms various rules and standards from time to time within OTC world to ensure transparency, confidence and parties are protected . As new products exotic products are developed or if you see a recent transition from LIBOR to SOFR rates for valuation, ISDA played a vital role to ensure smooth transition takes place .

In negotiation of the ISDA , there are lawyers and legal team , also known as ISDA negotiator from both the parties who mutually agree on the terms of the agreement that needs to part of ISDA Master agreement, Schedule and CSA. Trade done whiteout an ISDA agreement can be termed as null and void in court of law in case of one party refuses to pay to other party however there are exception to this though. For example : Trade confirmation with declaimer clause can be legally binding that the parties are working on best effort bases to sign ISDA agreement

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