The framework agreement and timetable define the reasons why one party may impose the closure of covered transactions due to the appearance of a termination event by the other party. Standard termination events include defaults or bankruptcy. Other closing events that can be added to the calendar include a downgrade of credit data below a specified level. The ISDA Masteragrement, published by the International Swaps and Derivatives Association, is the most widely used master service contract for otC derivatives transactions internationally. It is part of a documentary framework that aims to provide comprehensive and flexible documentation on OVER-the-counter derivatives. The framework consists of a master contract, a calendar, confirmations, definition brochures and credit support documentation. There are different types of credit support documentation created by ISDA. Among the most important distinctions between them are their current legislation (English, New York and Japanese) and the nature of the transfer of collateral (transfer of ownership and interest on securities). The Captain`s Agreement is a document agreed between two parties, which sets out standard conditions for all transactions between these parties. Each time a transaction is concluded, the terms of the framework agreement should not be automatically renegotiated and applied. 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 on all transactions.
Point 1 (c) describes the concept of a single agreement and is of paramount importance as it forms the basis for the closure of the network. When a standard event occurs, all transactions are completed without exception. The concept of out-of-gap clearing prevents a liquidator from performing «cherry pickings,» i.e. paying profitable transactions for his bankrupt client and refusing to do so in the case of an unprofitable customer. The control agreement is the central document around which the rest of the ISDA documentation structure is grown. The Captain`s Agreement is a document agreed between two parties, which sets standard conditions for all transactions between these parties. Each time a transaction is concluded, the terms of the framework agreement should not be renegotiated and applied automatically. 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. This uniform approach to the agreement is an integral part of the structure and part of the network-based protection offered by the framework agreement. The fact that all transactions are the sole contract enhances the ability to close these transactions and obtain a one-time net amount payable in the event of default.