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Master Agreements - I
Which Products?
OTC Derivatives• Swaps• Caps, Floors, Collars• Options• FRA’s
Foreign Exchange Transactions
Securities Lending Transactions
Repurchase Transactions
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Master Agreements - II
National Master AgreementsDeutscher Rahmenvertrag für FinanztermingeschäfteAustrian, Swiss, Dutch and Spanish Master Agree-
ments
BBA Master Agreements IFEMA (FX only) ICOM (FX options only) FEOMA (FX and FX options)
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Master Agreements - III
International Master Agreements (cross-border)1992 ISDA Master Agreement (draft: 2002 ISDA
Master Agreement)PSA/ISMA Global Master Repurchase AgreementOSLA (Overseas Securities Lender‘s Agreement)AFB/FBF Convention-cadre relative aux opérations de
marché à terme
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Master Agreements - IV
European Banking FederationEMA = European Master Agreement (currently only
with annexes for repurchase and securities lending transactions; annex for derivatives under development)
The Bond Market Association Cross-Product Master Agreement
International Swaps and Derivatives Association Cross-agreement bridge (project)
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Master Agreements - V
Why Master Agreements?
simplification / standardization contractual framework Netting
• payment• close-out• insolvency• capital adequacy requirements• market risks
credit protection
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Structure
Master Agreement
Confirmation
Confirmation
Confirmation
Definitions
Definitions
Definitions
together: one single agreement
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Structure of1992 ISDA Master Agreement
Section 1 - 18: General
Schedule Part 1 - 4 (menue)
Schedule Part 5 - ___ (free choice)
Transaction (Swap)Confirmation
ISDA Definitions
1996 ISDA Equity Derivatives Definitions1997 ISDA Government Bond Option Def.1998 FX and Currency Option Definitions1998 ISDA Euro Definitions1999 ISDA Credit Derivatives Definitions2000 ISDA Definitions
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1992 ISDA Master Agreement I
Short summary of the most important provisions:
Sec. 1(c) Single Agreement Sec. 2(a) Conditions precedent (c) Payment netting (d) Gross-up (tax) Sec. 3 Representations Sec. 4 Agreements
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1992 ISDA Master Agreement II
Short summary of the most important provisions:
Sec. 5(a) Events of Default• (i) Failure to pay or deliver• (vi) Cross Default• (vii) Bankruptcy
Sec. 5(b) Termination Events• (i) Illegality• (iv) Credit Event upon Merger• (v) Additional Termination Event (Schedule)
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1992 ISDA Master Agreement III
Short summary of the most important provisions:
Sec. 6 Early Termination (close-out procedure)
• (a) Automatic Termination• (b) Termination upon Notice• (e) Calculation Method
– First Method („Walk Away“)– Second Method (Full Two Way Payment)– Market Quotation / Loss / Replacement Value under discussion
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1992 ISDA Master Agreement IV
Short summary of the most important provisions:
Sec. 9(e) Confirmations
Sec. 12 Notices
Sec. 13 Governing Law (New York or English Law), Jurisdiction: New York or England
Sec. 14 Definitions
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1992 ISDA Master Agreement- Schedule I -
Part 1: Termination Provisions
Specified Entity (e.g. Affiliates) Cross Default (Threshold) Credit Event upon Merger Automatic Termination Market Quotation or Loss Termination Currency
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1992 ISDA Master Agreement- Schedule II -
Part 2: Tax Representations
Part 3: Documents to be Delivered• signature list, Board Resolution, abstract from register,
Articles of Association, annual report, capacity legal opinion
Part 4: Miscellaneous• (a) Addresses for Notices• (b) Process Agent (affiliate or special company)• (d) Multibranch Party• (h) Governing Law (New York, English Law)
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1992 ISDA Master Agreement- Schedule III -
Part 5: Other Provisions (free choice)
Example:
• Incorporation of ISDA Definitions
• Set-off clause (obligations from other contracts)
• Relationship between Parties:– Non-Reliance– No Agency
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1992 ISDA Master Agreement- Confirmation -
Content of a Confirmation:
reference to (existing) master agreement
reference to applicable ISDA Definitions
special provisions
details of the transaction
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Netting- Overview -
1. Payment Netting
(settlement netting)
2. Novation Netting
3. Close-out Netting
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BA
Payment Netting
EUR-Interest Rate-Swap
floating fixed
Payment Date 1
3,5
3,5
(3,75)
net
10,25
(14)
3
Payment Date 4
Payment Date 3
Payment Date 2
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Novation Netting
FX Forwards
Novation on 25.06.1999:A pays 5 Euro, B pays 5,1 USD on 29.11.1999
Euro USD
USD Euro
10 10,6
5,5 5
26.05.1999
25.06.1999
29.11.1999
A B
A B
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Close-out Netting
Single Agreement
Master Agreement Transactions1. +4 MtM-value in favour of A2. –2 MtM-value in favour of A3. +1 MtM-value in favour of A4. +2 MtM-value in favour of A5. –1 MtM-value in favour of A6. +3 MtM-value in favour of A
Settlement Amount: + 7 MtM-value in favour of A + 2 unpaid amounts B
+ 0,2 interest on unpaid amounts B ./. 1 unpaid amounts A ./. 0,1 interest on unpaid amounts A
Sum: + 8,1 Close-out Amount (claim of A against B)
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Reduction of Credit Risk- Overview -
Supervisory Recognition of Netting
Novation Netting (BIZ 1988)
Close-out Netting• EU-Directive of 1996• Implementation in Germany:
– GroMiKV– Grundsatz I
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Supervisory Recognition of Netting
Conditions:contractual netting agreement (internationally customary or
recommended by trade association) single payment obligation in the event of insolvency or payment
defaultmutual obligation incorporation of individual transactionsvalidity and enforceability of netting agreement evidenced by
written and reasoned legal opinion from knowledgeable and independent third party
• annual update
• submission to BAKred
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Legal Opinions
• Insolvency Law jurisdiction of headquarter jurisdiction of branches
• No Capacity Opinion
• Sponsors of Legal Opinions ISDATBMA / ISMAZentraler Kreditausschuß
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Collateral I
Reduction of Exposure which remains after Netting:expanded use of credit linesfurther reduction of capital requirements
Types of Collateral:CashGovernment BondsCorporate BondsShares
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