The mastery agreement is the central document around which the rest of the ISDA documentation structure is cultivated. The pre-printed framework contract is never amended, with the exception of the addition of the names of the parties, but is adapted to the master agreement by the use of the calendar, a document containing options, additions and changes to the framework contract. Over-the-counter derivatives are traded between two parties, not through an exchange or intermediary. The size of the over-the-counter market means that risk managers must carefully review traders and ensure that authorized transactions are properly managed. When two parties complete a transaction, they will each receive confirmation explaining their details and referring to the signed agreement. The terms of the ISDA master contract then cover the transaction. Derivatives transactions are generally conducted orally or electronically and the contract between the parties is concluded on that date. Proof of the terms of the transaction is contained in a confirmation (also known as a business advice or contract note), usually a short letter, fax or email. The form of the confirmation is defined in the framework contract and a limited period of time is generally allowed for any objection or change in confirmation after receipt.
Confirmations are generally very short (excluding complex transactions) and contain little more than dates, amounts and prices. Confirmations are exchanged to minimize the possibility of litigation over the terms of a transaction. Most multinational banks have ISDA master agreements. These agreements generally apply to all branches engaged in currency, interest rate or option trading. Banks require counterparties to sign an exchange agreement. Some also require exchange agreements. While the ISDA master contract is the norm, some of its terms and conditions are changed and defined in the accompanying schedule. The schedule is negotiated, either to cover (a) the requirements of a given hedging transaction or (b) a current business relationship. The framework contract also helps to reduce litigation by providing significant resources that define its contractual terms and explain the intent of the contract, thus preventing litigation from beginning and providing a neutral resource for interpreting standard contractual terms. Finally, the framework agreement provides significant assistance in managing risks and credit for the parties. The most important thing is to remember that the ISDA executive contract is a clearing agreement and that all transactions are interdependent. Therefore, a default in a transaction counts by default among all transactions.
Point 1 (c) describes the concept of a single agreement and is of paramount importance as it forms the basis for network closures. When a standard event occurs, all transactions are completed without exception. The concept of out-of-gap clearing prevents a liquidator from making “cherry pickings,” i.e. making payments on profitable transactions for his bankrupt client and refusing to do so in the case of an unprofitable customer.