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.
This FAQ is divided into five sections:
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:
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 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.
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
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.
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.
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.
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.
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:
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.
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
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.