Overview

The International Swaps and Derivatives Association (ISDA /ˈɪzdə/) is a trade organization of participants in the market for over-the-counter derivatives. It is headquartered in New York City.

It has created a standardized contract (the ISDA Master Agreement) to enter into derivatives transactions. In addition to legal and policy activities, ISDA manages FpML (Financial products Markup Language), an XML message standard for the OTC Derivatives industry. ISDA has more than 925 members in 75 countries; its membership consists of derivatives dealers, service providers and end users.

History

ISDA was initially created in 1985 as the International Swap Dealers Associations, Inc. and subsequently changed its name switching "Swap Dealers" to "Swaps and Derivatives". This change was made to focus more attention on their efforts to improve the more broad derivatives markets and away from strictly interest rate swap contracts.

In 2009 a New York Times article mentioned that in 2005 the ISDA allowed rule changes to CDO payouts (Pay as You Go) that would benefit those who bet against (shorted) mortgage-backed securities, like Goldman Sachs, Deutsche Bank, and others.

ISDA has offices in New York, London, Hong Kong, Tokyo, Washington D.C., Brussels and Singapore. It has more than 800 member firms from six continents. The current Chief Executive Officer is Scott O'Malia, who joined ISDA in 2009.

ISDA Master Agreement

The ISDA Master Agreement is typically used between a derivatives dealer and its counterparty when discussions begin surrounding a derivatives trade. There are two basic forms of Master Agreement: single jurisdiction/currency and multiple jurisdiction/currency. One of these documents is generally combined with a Schedule to set out the basic trading terms between the parties; each subsequent trade is then recorded in a Confirmation which references the Master Agreement and Schedule. The terms of the Schedule are often negotiated, and many firms have preferred versions of the Schedule.

According to Financial Times reporter Stacy-Marie Ishmael, the Master Agreement is "fundamental to, and provides a template for, the derivatives market."

ISDA has also drafted a Tahawwut Master Agreement in cooperation with the International Islamic Financial Market, with the aim of standardizing derivatives transactions under Islamic law.

Versions

The Protocol also introduced more standardized terms in order to limit the scope of negotiation in individual CDS transactions, thus making individual contracts more fungible in trading.

ISDA's report commissioned by the "UK Financial Services Authority on behalf of the international group of OTC derivative supervisors asked ISDA in October 2009 to conduct a broad market review of bilateral collateralization practices for OTC derivatives to facilitate better understanding of current market practice, especially as it relates to the different types of counterparties active in the market."(ISDA 2010, p. 2)

Netting

Possibly the most important aspect of the ISDA Master Agreement is that the Master Agreement and all the Confirmations entered into under it form a single agreement. This is very important (especially for regulated financial companies) as it allows the parties to an ISDA Master Agreement to aggregate the amounts owing by each of them under all of the Transactions outstanding under that ISDA Master Agreement and replace them with a single net amount payable by one party to the other.

Netting, dealt with under section 2(c) of the ISDA Master Agreement, allows the parties to net out amounts payable on the same day and in the same currency.

ISDA also produces a model "Netting Act" which can be adopted by jurisdictions where close-out netting does not work effectively at present.