The International Swaps and Derivatives Association (ISDA) is a trade organization of the financial industry that deals with over-the-counter (OTC) derivatives. ISDA has developed the ISDA Master Agreement, which is a standardized document used for OTC derivatives transactions.
The ISDA Master Agreement is a legal document that establishes the terms and conditions for derivatives transactions between two parties, known as counterparties. The agreement contains various provisions, including definitions of the types of derivatives, payment and delivery terms, and events of default. The ISDA Master Agreement also includes standard legal terms, such as governing law, dispute resolution, and confidentiality.
ISDA also publishes standard definitions for various derivatives products, such as interest rate swaps, credit default swaps, and foreign exchange options. These definitions provide a common language for market participants and facilitate the development of standard documentation for derivatives transactions.
In addition to the ISDA Master Agreement, other documentation may be required for derivatives transactions. For example, a confirmation document is often used to confirm the details of a specific derivatives transaction, such as the notional amount, the term, and the payment schedule. Other documents, such as collateral agreements and credit support annexes, may be required to manage counterparty credit risk.
It is important to note that the use of standardized documentation, such as the ISDA Master Agreement, helps to reduce legal and operational risk in derivatives transactions by providing a clear framework for the parties involved.