The ISDA Master Agreement, published by the International Swaps and Derivatives Association (ISDA), is the most commonly used master service agreement for over-the-counter (OTC) derivatives transactions internationally.ISDA. (2025). Short Description: Master Service Agreement. ISDA Legal Guidelines.ISDA. (2002). 2002 ISDA Master Agreement. Section 1(a). It is part of a framework of documents, designed to enable OTC derivatives to be documented fully and flexibly.ISDA. (2003). User's Guide to the 2002 ISDA Master Agreement. p. 1. The framework consists of a master agreement, a schedule, confirmations, definition booklets, and credit support documentation.Harding, P. (2002). Mastering the ISDA Master Agreement. Financial Times/Prentice Hall.
The master agreement is a document agreed to between two parties that sets out standard terms that apply to all the transactions entered into between those parties.ISDA. (1992). 1992 ISDA Master Agreement (Multicurrency-Cross Border). Preamble. Each time that a transaction is entered into, the terms of the master agreement apply automatically and do not need to be re-negotiated.Wood, P. R. (2007). Law and Practice of International Finance. Sweet & Maxwell.
Although it is often viewed as a tool for banks and financial institutions, the Master Agreement is widely used by a wide variety of counterparties.Flanagan, S. (2001). The Use of ISDA Master Agreements by Non-Financial Corporates. Journal of Financial Law.
Advantages
The master agreement is quite lengthy, and the negotiation process can be burdensome, but once a master agreement is signed, the documentation of future transactions between parties is reduced to a brief confirmation of the material terms of the transaction.Henderson, S. K. (2010). Henderson on Derivatives. LexisNexis.
The master agreement also aids in reducing disputes by providing extensive resources defining its terms and explaining the intent of the contract, thereby preventing disputes from beginning as well as providing a neutral resource to interpret standard contractual terms.ISDA. (2021). ISDA Definitions and Supporting Materials. isda.org. Finally, the master agreement greatly aids in risk and credit management for the parties.Hull, J. C. (2018). Options, Futures, and Other Derivatives. Pearson.
History
The ISDA Master Agreement is a development of the Swaps Code, introduced by ISDA in 1985 and updated in 1986.ISDA. (1985). Code of Standard Wording, Assumptions and Provisions for Swaps. In its earliest form, it consisted of standard definitions, representations and warranties, events of default, and remedies.Goode, R. (2004). Legal Problems of Credit and Security. Sweet & Maxwell.
In 1987, ISDA produced three documents: (i) a standard form master agreement for U.S. dollar interest-rate swaps; (ii) a standard form master agreement for multi-currency interest-rate and currency swaps (collectively known as the "1987 ISDA Master Agreement"); and (iii) the interest rate and currency definitions.ISDA. (1987). 1987 ISDA Master Agreement Package.
The 1990s resulted in major document production by ISDA, including (i) a revised version of the Swaps Code, known as the 1991 ISDA Definitions, drafted and replaced later by the 2000 ISDA Definitions; (ii) a revision to the 1987 Master Agreement resulting in the 1992 Master Agreement; (iii) the User's Guide to the 1992 Master Agreement, drafted in 1993, explaining in detail each section of the 1992 Master Agreement; (iv) the Commodities Derivatives Definitions, drafted in 1993 and supplemented in 2000; and (v) the Annex, providing for collateral documentation, finalised in 1994, followed by its User's Guide in 1995.ISDA. (1995). Historical Archives of ISDA Documentation 1990-1995.
The Master Agreement was updated again in 2002 (known as the 2002 ISDA Master Agreement).2002 ISDA Master Agreement Protocol , www.isda.org The move to update the 1992 Agreement had its origins in the succession of crises that affected the global financial markets in the late 1990s.Bank for International Settlements. (1999). Market Liquidity: Research Findings and Selected Policy Implications. These events, including the liquidation of Hong Kong broker-dealer Peregrine Investments Holdings and the 1998 Russian financial crisis, tested the ISDA documentation to a previously unseen degree.Financial Stability Board. (2000). Report on the Russian Financial Crisis and its Implications. Although the ISDA documentation withstood that test, ISDA decided to establish a strategic review of its documentation to see what lessons could be learned from these events.ISDA. (2001). Strategic Review of ISDA Documentation. This review led, in time, to the full-scale update of 1992 Agreement, which culminated in the 2002 Agreement.Johnson, C. A. (2002). The 2002 ISDA Master Agreement: A Commentary.
Document architecture The master agreement is the central document around which the rest of the ISDA documentation structure is built.ISDA. (2002). Architecture of the ISDA Documentation. The preprinted master agreement is never altered except to insert the names of the parties, but is customised through use of the schedule to the master agreement, a document containing elections, additions and amendments to the master agreement.DerivsDocu. (2013). Anatomy of the ISDA Schedule.
Together with the schedule, the master agreement sets forth all of the general terms and conditions necessary to properly allocate the risks of the transactions between the parties but does not contain any commercial terms specific to a particular transaction.Cisinski, G. (2014). Understanding ISDA Documentation. Wiley. Once the master agreement is executed, the parties can enter into numerous transactions by agreeing to the material commercial terms over the telephone as evidenced by a written confirmation without any need to revisit the underlying terms contained in the master agreement.Financial Conduct Authority. (2015). Market Conduct Sourcebook: Confirmations.
There are two versions of the Master Agreement, the local version for transactions between parties located in the same jurisdiction who are transacting in only one currency, and the multicurrency version for use when parties are located in different jurisdictions transacting in different currencies.ISDA. (1992). 1992 ISDA Master Agreement (Local Currency-Single Jurisdiction). The provisions included in the multicurrency version but not in the local currency version concern issues such as taxes, currency of payment, the use of multiple offices to enter into transactions, and the designation of an agent for service of process.Benjamin, J. (2007). Financial Law. Oxford University Press.Linklaters. (2018). Choosing your ISDA Master Agreement Form.
Single agreement
Section 1(c) of the 2002 ISDA Master Agreement states that:ISDA. (2002). 2002 ISDA Master Agreement. Section 1(c).
All transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties ... and the parties would not otherwise enter into any Transactions.ISDA. (2002). 2002 ISDA Master Agreement. Section 1(c) (Internal Quote).This single agreement concept is integral to the structure and forms part of the netting based protection offered by the master agreement.Golden, J. (2012). The Single Agreement Concept in Derivatives Law. Capital Markets Law Journal. The fact that all transactions are the one contract reinforces the ability to close out those transactions and come up with a single net amount payable if a default occurs.Duffie, D. (2011). How Big Banks Fail and What to Do About It. Princeton University Press.
Events of default and termination events
Section 5 of the ISDA Master Agreement contains the "Events of Default" and the "Termination Events".ISDA. (2002). 2002 ISDA Master Agreement. Section 5. These are events which can lead to termination of transactions before their intended maturity.Pickering, J. (2010). Early Termination under ISDA.
The Events of Default can be described in summary as events for which a party is at fault, such as a failure to perform under a transaction, breach of a representation or undertaking, and insolvency.ISDA. (2002). 2002 ISDA Master Agreement. Section 5(a).
The Termination Events are other events which, although no-one is at fault, warrant the early termination of the transactions, such as a change in tax law resulting in taxes being imposed on transactions, illegality, and a merger of a party resulting in a deterioration in its credit quality.ISDA. (2002). 2002 ISDA Master Agreement. Section 5(b). Parties may also elect to specify Additional Termination Events in the Schedule, such as a decline in a corporate party's credit rating or a decline in a hedge fund's Net asset value.
Close out and netting
Section 6 of the ISDA Master Agreement contains the provisions which enable a party to terminate transactions early if an Event of Default or Termination Event occurs in respect of the other party and set out the procedure to calculate and net the termination values of those transactions to produce a single amount payable between the parties.ISDA. (2002). 2002 ISDA Master Agreement. Section 6.
There are two elections that the parties make in the Schedule which affect the operation of these provisions:ISDA. (1992). 1992 ISDA Master Agreement Schedule. Part 1.
whether the party not at fault is required to pay if the net termination amount is worked out to be payable to the party at fault.Briggs, J. (2005). Netting and the First Method. This is a choice of payment method between "First Method" (under which the party not at fault does not need to pay) and "Second Method" (under which the party not at fault is required to pay);Maheshwari, S. (2008). The Evolution of Payment Methods in Derivatives Agreements.
whether the termination values for the transaction will be determined by obtaining quotes from dealers in the market for replacement transactions or by the party not at fault working out how much it has lost or gained as a result of early termination.ISDA. (1992). 1992 ISDA Master Agreement. Section 6(e). This is a choice of payment measure between "Market Quotation" and "Loss".Braithwaite, J. P. (2016). The Strategic Use of the ISDA Master Agreement. International & Comparative Law Quarterly.
The above only applies in relation to the 1992 Master Agreement.ISDA. (2003). Differences between 1992 and 2002 ISDA Master Agreements. The 2002 Master Agreement did away with First and Second method.ISDA. (2002). 2002 ISDA Master Agreement. Section 6(e) (Revisions). In practice First Method was very rarely opted for because its use required the relevant financial institutions to report their gross, rather than net, exposure under the Master Agreement.Schwerter, S. (2004). Gross vs Net Exposure in Derivative Transactions. The 2002 Master Agreement also replaced the distinction between Market Quotation and Loss with a single concept, "Close-out Amount".ISDA. (2002). 2002 ISDA Master Agreement. Section 14 (Definitions). This is determined in respect of each Terminated Transaction and is, broadly, the profit or loss which would be made in incurred on entering into an equivalent Transaction as of the Early Termination Date.Wyman, O. (2003). Valuing Close-out Amounts under the 2002 ISDA. The aggregate of the Close-out Amounts and Unpaid Amounts is referred to as the "Early Termination Amount".ISDA. (2002). 2002 ISDA Master Agreement. Section 6(e). This is the net amount payable by one party to the other in respect of the Terminated Transactions.Allen & Overy. (2002). The 2002 ISDA Master Agreement: A Client Guide.
Taxation