Frequently Asked Questions

THIS FAQ DOES NOT PURPORT AND SHOULD NOT BE CONSIDERED TO BE A GUIDE TO OR EXPLANATION OF ALL RELEVANT ISSUES OR CONSIDERATIONS IN CONNECTION WITH THE 2002 MASTER AGREEMENT PROTOCOL. PARTIES SHOULD THEREFORE CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING THE 2002 MASTER AGREEMENT PROTOCOL. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH ANY OF ITS DOCUMENTATION OR ANY DEFINITION OR PROVISION CONTAINED THEREIN MAY BE PUT.

Please note that this FAQ page may be updated over time. Last updated 18th February 2004.

This FAQ is divided into five sections:

Introduction and Overview of 2002 Master Agreement Protocol

What is the purpose of the 2002 Master Agreement Protocol?

The purpose of the Protocol is to offer market participants an efficient way to address various issues that arise when certain documents published by ISDA before 2002 (“Pre-2002 Documents”) are used with a 2002 Master Agreement. These issues arise because Pre-2002 Documents were not drafted with the 2002 Master Agreement in mind. In fact, many of them were published with the 1992 Master Agreement in mind. They therefore contain references to the 1992 Master Agreement and references to certain terms and concepts contained in the 1992 Master Agreement that are not contained in the 2002 Master Agreement (such as Market Quotation and Loss). The Protocol aims to provide simple solutions to any technical difficulties that might arise as a result.

How does the 2002 Master Agreement Protocol work?

The Protocol reflects an innovative procedure which allows for various standardised amendments to be deemed to be made to one or more Pre-2002 Documents when those documents are used in connection with a 2002 Master Agreement. It builds on the principle that parties may agree with one or more other parties that certain terms and provisions will apply to their respective relationships now and/or in the future (unless and until they specifically agree otherwise).

The Protocol provides a multilateral mechanism which enables multiple parties to agree that, in respect of any 2002 Master Agreement now or in the future between any two of them, various standardised amendments will apply when certain Pre-2002 Documents are used in connection with that 2002 Master Agreement.

Market participants (“Adhering Parties”) indicate their participation in the Protocol arrangement by sending a letter (an “Adherence Letter”) to ISDA's office in New York or in London. The Adherence Letter allows the Adhering Party to specify which of eighteen Annexes containing standardised amendments it wishes to apply with respect to 2002 Master Agreements with other Adhering Parties.

By submitting the Adherence Letter, the Adhering Party agrees that the provisions of each selected Annex will apply in respect of any 2002 Master Agreement with another Adhering Party where or to the extent its selection of that Annex matches that made in the Adherence Letter submitted by the other Adhering Party.

The amendment and adherence process, among other matters, is set out in the Protocol itself, which is published on the Association's web site (www.isda.org), along with a form of the Adherence Letter. For further detail on the adherence process, please see the Protocol Mechanics section of this FAQ.

What ISDA publications are covered by the 2002 Master Agreement Protocol?

The coverage of the Protocol is comprehensive. The following ISDA publications are covered:

  • 1991 Definitions
  • 1998 Supplement to the 1991 Definitions
  • 2000 Definitions
  • 1992 FX and Currency Option Definitions
  • 1998 FX and Currency Option Definitions
  • 1993 Commodity Derivative Definitions
  • 2000 Supplement to the 1993 Commodity Derivative Definitions
  • 1994 Equity Option Definitions
  • 1996 Equity Derivatives Definitions
  • 1997 Government Bond Option Definitions
  • 1997 Bullion Definitions
  • 1997 Short Form Bullion Definitions
  • 1999 Credit Derivatives Definitions
  • 1994 Credit Support Annex (New York Law)
  • 1995 Credit Support Annex (English Law)
  • 1995 Credit Support Deed (English Law)
  • 1995 Credit Support Annex (Japanese Law)
  • 2001 Margin Provisions

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Why does the Protocol not cover ISDA's long-form confirmation templates and Bridges?

The Protocol does not provide for amendments to Confirmations based on any of ISDA's long-form confirmation templates because such Confirmations do not merely incorporate standard sets of definitions and provisions, but are self-contained and are more likely to vary the types of provisions that give rise to the issues addressed in the Protocol than Confirmations based on ISDA's short-form confirmation templates. However, parties using such Confirmations in connection with a 2002 Master Agreement will want to consider similar issues to those addressed in the Annexes to the Protocol. For example, in the long-form ISDA "Confirmation of OTC Credit Swap Transaction Single Reference Entity Non-Sovereign", Paragraphs 7(b)(v)(B) and (C) refer to Market Quotation and Loss.

The Protocol does not provide for amendments to any of ISDA's standard form "bridges" for similar reasons. Parties wishing to use a form of ISDA bridge need to negotiate and reach agreement on a number of issues, and the final form of bridging provision used is likely to be carefully tailored to their individual relationship. Among the issues the parties will want to consider before using the 2001 Cross-Agreement Bridge or the 2002 Energy Agreement Bridge with a 2002 Master Agreement is that those bridges contain references to other forms of ISDA Master Agreement and neither refers to the Close-out Amount methodology in the 2002 Master Agreement.

Why should I consider participating in the 2002 Master Agreement Protocol?

It is expected that the 2002 Master Agreement will become the standard agreement used by participants in the international OTC derivatives markets. Until the Association updates its entire documentation library, parties to 2002 Master Agreements will wish to use certain Pre-2002 Documents in connection with such agreements. With this in mind, even market participants who have not yet decided to enter into a 2002 Master Agreement should consider signing up to the Protocol.

The Protocol has a number of significant advantages. In summary:

  • The Protocol’s scope is comprehensive.
  • The amendments contemplated by the Annexes are standardised and the result of widespread industry consultation.
  • The multilateral procedure saves time and expense that would otherwise be spent on bilateral negotiations with individual counterparties.
  • The Protocol is supported by legal opinions under English and New York law.


For whom is the 2002 Master Agreement Protocol designed?

The Protocol is designed for all types of participants in the OTC derivatives markets, including (but not limited to) any bank, corporation, government, investment firm, insurance company, pension fund and other fund entity, partnership and private individual that either has entered into or anticipates that it might in the future enter into a 2002 Master Agreement. The Protocol was not designed with any particular type of derivative user in mind and in no way discriminates between different types of users.

Do I need to be an ISDA member firm to participate in the 2002 Master Agreement Protocol?

No. The Protocol is open equally to members of the Association and non-members.

Do I need to have entered into a 2002 Master Agreement before participating in the 2002 Master Agreement Protocol?

No. Participation in the Protocol is not limited to market participants that have already entered into a 2002 Master Agreement. The Protocol has been specifically designed to be open to any market participant that either has entered or may in the future enter into a 2002 Master Agreement. It is forward looking in that if and when any two Adhering Parties do enter into a 2002 Master Agreement, the provisions of the Protocol, as agreed between them, will apply to their relationship under that 2002 Master Agreement.

Does participation in the 2002 Master Agreement Protocol have any effect on 1992 ISDA Master Agreements?

No. The Protocol only affects agreements in the form of the 2002 Master Agreement. It does not affect any agreement in a form other than the 2002 Master Agreement. So, for example, it does not affect existing 1992 Master Agreements (or any Transactions now or in the future governed by that 1992 Master Agreement or any credit support provisions now or in the future related to it) or 1992 Master Agreements entered into in the future.

Is the 2002 Master Agreement Protocol in any way related to previous ISDA Protocols (e.g., the EMU Protocol)?

No. This Protocol is separate and independent from each other ISDA Protocol. Whether or not a party has adhered to any other ISDA Protocol is irrelevant for purposes of this Protocol.

What alternatives (if any) are there to participating in the 2002 Master Agreement Protocol?

For any market participant wishing to use Pre-2002 Documents with a 2002 Master Agreement (whether now or in the future), the alternative to adhering to the Protocol is to address the various issues in the Schedule to each 2002 Master Agreement it enters into and, potentially, in each Confirmation for a Transaction governed by such a 2002 Master Agreement and each credit support document relating to such a 2002 Master Agreement. The issues could be addressed by way of individually negotiated provisions or by incorporating relevant provisions of the Protocol by reference. However, in either case, bilateral negotiations would be required, and these could be time consuming and therefore costly.

2002 Master Agreement Protocol Mechanics

Basics

If I sign up to the Protocol, will it cover all Transactions involving pre-2002 sets of Definitions that I enter into under a 2002 Master Agreement and all credit support arrangements related to a 2002 Master Agreement?

Possibly not, even if you select all Annexes in your Adherence Letter, for at least three reasons. Firstly, you may enter into 2002 Master Agreements with parties that do not adhere to the Protocol. Secondly, Annexes selected by an Adhering Party only apply with respect to another Adhering Party to the extent that the parties' selections match. Thirdly, it is possible that you will document a Transaction using one of ISDA's older long-form confirmation templates (which are not covered by the Protocol). However, where two parties both select all Annexes in their Adherence Letters, it may be that the Protocol would cover each document published by ISDA before 2002 that the parties would actually wish to use in connection with a 2002 Master Agreement.

Can only English and New York law contracts be covered by the 2002 ISDA Master Agreement Protocol?

No. The Protocol is intended to cover 2002 Master Agreements, regardless of the governing law of the agreement. However, parties to a 2002 Master Agreement governed by a law other than English law or New York law will want to consider whether there is legal opinion support for the enforceability of the Protocol if used in respect of 2002 Master Agreements governed by such laws.

Is ISDA providing accompanying legal opinions on the 2002 Master Agreement Protocol?

Yes. The Association's English and New York counsel, Allen & Overy, has prepared legal opinions on the effectiveness of the Protocol arrangement under New York and English law. Copies of these opinions are available here.

Do Adhering Parties have to accept all of the 2002 Master Agreement Protocol provisions?

No. The Adherence Letter allows parties to elect one or more of the eighteen Annexes containing the standardised amendments.

How can I check the signing authority of other 2002 Master Agreement Protocol adherents?

For security reasons, Adherence Letters on ISDA's web site will have signatures conformed into type and signing authority information will not be displayed. Any supporting documents delivered to ISDA will not be made available (except in special cases). However, should parties wish to take steps to ascertain signing authority, the posted Adherence Letter will include a contact name and contact details.

Can I get copies of supporting documents or hard copies of Adherence Letters?

Yes. If you wish to obtain hard copies of Adherence Letters, each Adherence Letter posted on ISDA's web site will include a contact name and contact details for the person who can send them such documents. In special circumstances only (e.g., in litigation, when properly subpoenaed by a court of law), ISDA can provide certified copies of the documents held.

Which party in a corporate group must adhere?

Each legal entity that either has entered into or anticipates that it might in the future enter into a 2002 Master Agreement must adhere separately in its own capacity if it wishes to adhere to the Protocol. The Protocol does not contemplate adherence by a group of separate legal entities.

Can I use one Adherence Letter for all my firms' affiliates?

No. A separate Adherence Letter must be submitted for each legal entity adhering to the Protocol. This is to ensure that all Adherence Letters are submitted in the same form and to preserve a straightforward mechanical process of administration.

Adherence

How long do I have to participate in the 2002 Master Agreement Protocol; is there a deadline?

The Protocol will be open for adherence between 15th July 2003 and 1st June 2004. Please note that pursuant to the terms of the Protocol, the original deadline of 1st March 2004 was extended to 1st June 2004.

Why is there a limited adherence period for the 2002 Master Agreement Protocol?

There is a limited adherence period to provide Adhering Parties (as well as the Association) with a measure of certainty and finality. The limited adherence period should also encourage market participants to consider the issues addressed by the Protocol sooner rather than later, thereby assisting with the smooth and efficient functioning of the OTC derivatives markets. Also, because the Protocol is forward looking and allows an Adhering Party to address issues even in respect of 2002 Master Agreements that it enters into with other Adhering Parties at any time in the future, there is no need to keep the adherence period open indefinitely.

How will I know who has adhered to the 2002 Master Agreement Protocol?

A list of Adhering Parties, updated every day during the Protocol period, is displayed on ISDA's web site. The web site also offers access to scanned copies of Adherence Letters. For security reasons, only the conformed copies of Adherence Letters are displayed. Adhering Parties therefore simply need to monitor the web site to determine which other market participants have adhered and to check for matching elections.

Modification and Amending

Can I modify the wording of the 2002 Master Agreement Protocol or the substantive clauses?

No. Any changes to the standardised wording set out in the Protocol or to the standard form Adherence Letter will be considered invalid and unenforceable.

Counterparties can, of course, negotiate and agree to any changes bilaterally outside the scope of the Protocol. The Protocol in no way inhibits freedom of contract whether the parties have adhered to the Protocol or not. If parties to a 2002 Master Agreement do wish to vary the terms of the Protocol as they would otherwise apply to, for example, a Transaction incorporating a particular ISDA definitions booklet, Section 5(b) of the Protocol describes how they should do so.

Revocation

Can I revoke my participation in the 2002 Master Agreement Protocol?

Once an Adherence Letter has been accepted by ISDA, an Adhering Party is bound by all amendments elected by way of the matching procedure with other parties that have already adhered to the Protocol or, subject to the discussion below, that adhere before the end of the adherence period.

However, an Adhering Party may, at any time during the adherence period deliver to ISDA a further notice specifying an earlier cut-off date in respect of its own adherence. The effect of such a letter will be to withdraw adherence as of the future date specified. Although amendments already made will not be revoked, any subsequent adherence by one of the Adhering Party’s counterparties will be ineffective in respect of a 2002 Master Agreement between them. Given that ISDA decided to extend the adherence period, Adhering Parties will also have the ability to deliver a notice to ISDA on or before 12th March 2004 retrospectively designating 1st March 2004 as an earlier cut-off date.

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2002 Master Agreement Protocol Provisions

What are the issues addressed by the 2002 Master Agreement Protocol?

The Protocol provides for a number of amendments to be deemed to be made to certain Pre-2002 Documents when those documents are used in connection with a 2002 Master Agreement. Some issues arise in only one Pre-2002 Document, but a number of issues arise in more than one Pre-2002 Document and are therefore addressed in more than one Annex:

  • References to the 1992 ISDA Master Agreement
    References to the 1992 ISDA Master Agreement (or its predecessors) are deemed to be replaced with references to the 2002 Master Agreement.

  • Definitions of "Confirmation"
    Definitions of "Confirmation" contained in sets of ISDA Definitions published before 2002 refer to documents and other confirming evidence exchanged between the parties. The definition of "Confirmation" contained in the 2002 Master Agreement differs from that contained in the 1992 Master Agreement and its predecessors in that it refers to documents and other confirming evidence exchanged between the parties or otherwise effective for the purpose of confirming or evidencing Transactions. The Protocol provides for the definitions of "Confirmation" contained in pre-2002 sets of ISDA Definitions to be deemed to be similarly amended when used in connection with a 2002 Master Agreement.

  • Conditions precedent
    The 2002 Master Agreement clearly distinguishes between conditions precedent for the purpose of Section 2(a)(iii) and other types of conditions or contingencies. So, for example, if parties wish to apply a condition precedent in addition to the standard conditions precedent specified in Sections 2(a)(iii)(1) and (2), they must specify such a condition as a condition precedent for the purpose of Section 2(a)(iii). The Protocol similarly seeks to clarify references to conditions precedent in pre-2002 sets of ISDA Definitions when used with a 2002 Master Agreement. For example, amounts are frequently expressed to be payable "subject to any applicable condition precedent". These references are deemed to be replaced with references to "subject to any other applicable provisions", clarifying that not only Section 2(a)(iii) conditions precedent may be relevant for this purpose.

  • Termination Currency
    Under the 2002 Master Agreement there is no requirement to specify a Termination Currency. If the parties do not specify a Termination Currency, it will, if New York law is the governing law, be U.S. Dollars, and if English law is the governing law, be Euros. Accordingly, references to "the currency specified as the Termination Currency", for example, are replaced by references to "the Termination Currency".

  • Cash settlement provisions
    Some pre-2002 sets of ISDA Definitions (the 1998 Supplement to the 1991 Definitions and the 2000 Definitions) include various methods of cash settlement where a swap terminates due to the exercise of an option to terminate or the operation of a mandatory break clause. Some of these methods rely on Market Quotation, as defined in the 1992 Master Agreement. Since Market Quotation has been replaced in the 2002 Master Agreement with Close-out Amount, the Protocol provides that Close-out Amount will be deemed to apply instead of Market Quotation. However, the procedure of determining the cash settlement amount payable by obtaining quotations from reference banks is preserved, since the amendment provides that the Close-out Amount in such cases must be determined on the basis of such quotations.

  • Mini close-out provisions
    Several pre-2002 sets of ISDA Definitions provide for the close-out of a single Transaction (or, sometimes, a number of Transactions) in certain circumstances (for example, if a party cannot make the delivery required under a physically-settled option due to circumstances outside his control). These provisions stipulate that there will be a close-out of the Affected Transaction or Transactions in accordance with Section 6 of the ISDA Master Agreement (that is, the 1992 Master Agreement) as if a Termination Event or an Additional Termination Event had occurred, either on the basis that one party is the sole Affected Party or on the basis that there are two Affected Parties.

    Some of these provisions provide for Market Quotation to apply; others provide for Loss to apply. The Protocol provides for Close-out Amount to apply instead of Market Quotation or Loss, as the case may be. Note that, where references to Market Quotation are replaced with references to Close-out Amount, the Protocol preserves the procedure of obtaining quotations by providing that the Close-out Amount in such cases must be determined on the basis of quotations obtained from one or more third parties. For the avoidance of doubt, the Protocol also provides that, in these circumstances, no account will be taken of any hedging costs incurred (or gains realised) in connection with the termination, liquidation or re-establishment of a related hedging position. This is consistent with what would have been the position had Market Quotation applied.

    The Protocol also clarifies those mini close-out provisions that deem that a Termination Event (rather than an Additional Termination Event) has occurred. Under the 2002 Master Agreement, a different (mid-market) valuation procedure applies if Transactions are terminated as a result of an Illegality or a Force Majeure Event rather than any other type of Termination Event. The Protocol resolves the ambiguity by making clear whether what is deemed to have occurred is either an Illegality or a Force Majeure Event or another type of Termination Event. Where these provisions provide that the close-out will be carried out on the basis that there are two Affected Parties, the Protocol provides that an Illegality or a Force Majeure Event will be deemed to have occurred, thereby making use of the mid-market valuation procedure contained in the 2002 Master Agreement.

  • Credit Support Provisions
    The Protocol includes standardised amendments to each of ISDA's credit support documents to take account of the introduction of Close-out Amount in the 2002 Master Agreement. For example, the Protocol includes amendments to provisions describing how "Exposure" is to be determined.

    In those credit support documents that include the concept of a "Specified Condition" (that is, each credit support document other than the 1995 Credit Support Annex (English law)), "Force Majeure Event" is added to the list of events that can be specified as Specified Conditions.

Why is there not an Annex addressing Euro issues?

The previous ISDA Protocols that addressed issues arising as a result of the introduction of the Euro were relevant in the context of already existing transactions involving the European "legacy currencies" (the former currencies of the member states of the European Union that adopted the Euro). These types of issues are not relevant in the context of new Transactions entered into under a 2002 Master Agreement.

Parties wishing to use certain of the older sets of ISDA Definitions to document Transactions involving the Euro should consider incorporating the 1998 Euro Definitions (together with the relevant older set of Definitions) into the Confirmation for the relevant Transaction.

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ISDA’s Role

What is ISDA's role in the 2002 Master Agreement Protocol?

ISDA acts, for certain purposes, as an agent for participating parties. It will receive Adherence Letters, update the web site from time to time and post scanned copies of conformed copy Adherence Letters. ISDA also publishes the Protocol and provides information about it to interested parties.

What will ISDA do with evidence of authority submitted to it?

ISDA will hold any evidence of authority in its files for safekeeping. Copies of this evidence of authority will only be provided in special circumstances, such as in litigation, when properly subpoenaed by a court of law. Parties are encouraged to contact their counterparties directly if they require such evidence for their files. Each adhering party will provide in their Adherence Letter details of a person to contact regarding such information.

How to Participate

How can I participate in the 2002 Master Agreement Protocol?

Market participants can participate by downloading all necessary information from the Association's web site and then submitting a signed Adherence Letter in the proper form (together with a conformed copy of the Adherence Letter and the appropriate payment) to either ISDA's New York or London office.

How can I encourage a counterparty to sign up to the 2002 Master Agreement Protocol?

The Association has prepared a standard form letter to assist Adhering Parties that wish to encourage others to sign up to the Protocol. Because the Protocol is forward looking, Adhering Parties may even wish to consider encouraging market participants with whom they do not currently have a derivatives trading relationship to adhere. (Form of counterparty letter)

Are parties required to provide evidence of authority to ISDA?

No. Parties can provide evidence of authority to ISDA if they so choose, but they are not required to do so.

What do I need to do after sending in my Adherence Letter?

Adhering Parties will wish to monitor adherence by others, match Adherence Letters, and satisfy themselves as to signing authority. They may also wish to negotiate with partly matched and non-adhering counterparties.

How much does adherence to the 2002 ISDA Master Agreement Protocol cost?

There is a flat charge of $500 for each legal entity that adheres to the Protocol.

How can I get a copy of the 2002 ISDA Master Agreement Protocol and other relevant information?

Copies of the Protocol, the form of Adherence Letter, counterparty letters and information about ISDA's role and other aspects of the Protocol are available on the Association's web site here.


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