ISDA: A Bible for Over-The-Counter (OTC) Market

downloadAs, Our blog is on global finance markets which, also includes OTC market as a major part of it. OTC market is regulated by ISDA guidelines thereby, ISDA acts as a “bible for an entire OTC Market”. Hence, our topic for today`s discussion is ISDA.

ISDA stands for “INTERNATIONAL SWAPS & DERIVATIVES ASSOCIATION“. ISDA is an association created by the private negotiated derivatives market that represents participating parties. This association helps to improve the private negotiated derivatives market by identifying and reducing risks in the market. ISDA was founded in 1985 and since then it has worked to make over-the-counter derivatives (OTC) markets safe and efficient. ISDA has headquarters in New York with offices in London, Hong Kong, Tokyo, Washington, D.C., Brussels, Singapore.

Today, ISDA has over 800 members from 60 countries. These members include a broad range of OTC derivatives market participants including corporations, government and supranational entities, investment managers, insurance companies, energy and commodities firms, and international and regional banks; as well as law firms, exchanges, clearinghouse and other service providers. ISDA is governed by its Board of Directors, which consists of 26 members with both buy and sell-side representation & the board is elected annually by its members. Members are classified into three categories according to the guidelines contained in the Association’s by-laws. These categories are:-

  1. Primary Members: According to the Association’s by-laws, every investment, merchant or commercial bank or other corporation, partnership or other business organization that, directly or through an affiliate, as part of its business (whether for its own account or as agent), deals in derivatives shall be eligible for election to membership in the Association as a Primary Member, provided that no person or entity participates in derivatives transactions solely for the purpose of risk hedging or asset or liability management.
  2. Associate Members: Associate Membership category is designed for service providers (for example, brokers, law firms, accounting firms, consulting firms, exchanges and software providers) who are active in the privately negotiated derivatives business. Associate Membership provides a forum for these industry participants to stay abreast of and contribute to important developments and initiatives.
  3. Subscriber Members: Subscriber Membership category is designed for corporations, financial institutions and government entities and others who use privately negotiated derivatives to better manage financial risks. Subscriber Membership provides a forum for these industry participants to stay abreast of and contribute to important developments and initiatives.

Working Of ISDA:
The pioneering work is to develop the ISDA Master Agreement and a wide range of related documentation materials, and to ensure the enforceability of their netting and collateral provisions. This has helped to significantly reduce credit and legal risk. The Association has been a leader in promoting sound risk management practices and processes, and engages constructively with policymakers and legislators around the world to advance the understanding and treatment of derivatives as a risk management tool. ISDA works in three key areas:

  • Reducing counterparty credit risk,
  • Increasing transparency, and
  • Improving the industry’s operational infrastructure.

This shows the strong commitment of the ISDA towards its primary goals, to build stable financial markets and a strong financial regulatory framework.

ISDA Master Agreement and Documentation:
ISDA offers a wide range of publications including the ISDA master agreement, definitional books and confirmations, so that the derivatives market has a means to efficiently streamline the documentation process of derivatives transactions. The ISDA Master Agreement, the authoritative contract, represents a milestone achievement because it has established international contractual standards governing privately negotiated derivatives transactions that reduce legal uncertainty and allow for reduction of credit risk through netting of contractual obligations. Ensuring the enforceability of the netting provisions of the ISDA Master Agreement has been, and remains, a key initiative, because of its importance in reducing the credit risk arising from the business. The scope of the ISDA opinions address the enforceability of the termination, bilateral close-out netting and multibranch netting provisions of the 1992 and 2002 Master Agreements. The opinions are updated annually to comply with requests from various central banks. In addition, ISDA also solicits legal opinions on the enforceability of the ISDA Credit Support Documents in various jurisdictions.

ISDA Amend:
It is a joint service provided by Markit and the International Swaps and Derivatives Association. With ISDA Amend, swap dealers and their clients can amend and share multiple ISDA master agreements with a single online tool, ensuring compliance. The ISDA Amend tool, also enables dealers and their clients to centrally manage Know Your Customer (KYC) and Anti-Money Laundering (AML) documentation requirements as well as control and track counterparty access at the fund and account level.

Mission Statement For ISDA: ISDA fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products.

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