Transcript OTC Master Agreements

OTC - Master Agreements
RA Hermann Stahl
Central Legal Dept.
Frankfurt/Main
Commerzbank AG
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Master Agreements - I
Which Products?
 OTC Derivatives
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Swaps
Caps, Floors, Collars
Options
FRA’s
 Foreign Exchange Transactions
 Securities Lending Transactions
 Repurchase Transactions
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Master Agreements - II
National Master Agreements
Deutscher Rahmenvertrag für Finanztermingeschäfte
Austrian, Swiss, Dutch and Spanish Master Agreements
BBA Master Agreements
 IFEMA (FX only)
 ICOM (FX options only)
 FEOMA (FX and FX options)
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Master Agreements - III
International Master Agreements (cross-border)
1992 ISDA Master Agreement (draft: 2002 ISDA
Master Agreement)
PSA/ISMA Global Master Repurchase Agreement
OSLA (Overseas Securities Lender‘s Agreement)
AFB/FBF Convention-cadre relative aux opérations de
marché à terme
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Master Agreements - IV
European Banking Federation
EMA = European Master Agreement (currently only
with annexes for repurchase and securities lending
transactions; annex for derivatives under development)
The Bond Market Association
 Cross-Product Master Agreement
International Swaps and Derivatives Association
 Cross-agreement bridge (project)
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Master Agreements - V
Why Master Agreements?
 simplification / standardization
 contractual framework
 Netting
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payment
close-out
insolvency
capital adequacy requirements
market risks
 credit protection
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Structure
Master Agreement
Confirmation
Definitions
Confirmation
Definitions
Confirmation
Definitions
 together: one single agreement
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Structure of
1992 ISDA Master Agreement
Section 1 - 18: General
Schedule Part 1 - 4 (menue)
Schedule Part 5 - ___ (free choice)
Transaction (Swap)
Confirmation
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ISDA Definitions
1996 ISDA Equity Derivatives Definitions
1997 ISDA Government Bond Option Def.
1998 FX and Currency Option Definitions
1998 ISDA Euro Definitions
1999 ISDA Credit Derivatives Definitions
2000 ISDA Definitions
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1992 ISDA Master Agreement I
Short summary of the most important provisions:
 Sec. 1(c)
 Sec. 2(a)

(c)

(d)
 Sec. 3
 Sec. 4
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Single Agreement
Conditions precedent
Payment netting
Gross-up (tax)
Representations
Agreements
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1992 ISDA Master Agreement II
Short summary of the most important provisions:
 Sec. 5(a)
Events of Default
• (i) Failure to pay or deliver
• (vi) Cross Default
• (vii) Bankruptcy
 Sec. 5(b)
Termination Events
• (i) Illegality
• (iv) Credit Event upon Merger
• (v) Additional Termination Event (Schedule)
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1992 ISDA Master Agreement III
Short summary of the most important provisions:
 Sec. 6 Early Termination (close-out procedure)
• (a) Automatic Termination
• (b) Termination upon Notice
• (e) Calculation Method
– First Method („Walk Away“)
– Second Method (Full Two Way Payment)
– Market Quotation / Loss / Replacement Value under discussion
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1992 ISDA Master Agreement IV
Short summary of the most important provisions:
 Sec. 9(e)
Confirmations
 Sec. 12
Notices
 Sec. 13
Governing Law (New York or English Law),
Jurisdiction: New York or England
 Sec. 14
Definitions
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1992 ISDA Master Agreement
- Schedule I Part 1: Termination Provisions
 Specified Entity (e.g. Affiliates)
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Cross Default (Threshold)
Credit Event upon Merger
Automatic Termination
Market Quotation or Loss
Termination Currency
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1992 ISDA Master Agreement
- Schedule II Part 2: Tax Representations
Part 3: Documents to be Delivered
• signature list, Board Resolution, abstract from register,
Articles of Association, annual report, capacity legal opinion
Part 4: Miscellaneous
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(a) Addresses for Notices
(b) Process Agent (affiliate or special company)
(d) Multibranch Party
(h) Governing Law (New York, English Law)
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1992 ISDA Master Agreement
- Schedule III Part 5: Other Provisions (free choice)
Example:
• Incorporation of ISDA Definitions
• Set-off clause (obligations from other contracts)
• Relationship between Parties:
– Non-Reliance
– No Agency
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1992 ISDA Master Agreement
- Confirmation Content of a Confirmation:
 reference to (existing) master agreement
 reference to applicable ISDA Definitions
 special provisions
 details of the transaction
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Netting
- Overview 1.
Payment Netting
(settlement netting)
2.
Novation Netting
3.
Close-out Netting
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Payment Netting
EUR-Interest Rate-Swap
A
B
floating
Payment Date 1
3
Payment Date 2
3,5
Payment Date 3
3,5
Payment Date 4
(3,75)
fixed
10,25
(14)
net
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Novation Netting
FX Forwards
26.05.1999
A
10
Euro
B
10,6
USD
25.06.1999
A
5,5
USD
B
5
Euro
29.11.1999
Novation on 25.06.1999:
A pays 5 Euro, B pays 5,1 USD on 29.11.1999
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Close-out Netting
Single Agreement
Master Agreement Transactions
1. +4 MtM-value in favour of A
2. –2 MtM-value in favour of A
3. +1 MtM-value in favour of A
4. +2 MtM-value in favour of A
5. –1 MtM-value in favour of A
6. +3 MtM-value in favour of A
Settlement Amount: + 7 MtM-value in favour of A
+2
unpaid amounts B
+ 0,2 interest on unpaid amounts B
./. 1 unpaid amounts A
./. 0,1 interest on unpaid amounts A
Sum:
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+ 8,1 Close-out Amount (claim of A against B)
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Reduction of Credit Risk
- Overview Supervisory Recognition of Netting
 Novation Netting (BIZ 1988)
 Close-out Netting
• EU-Directive of 1996
• Implementation in Germany:
– GroMiKV
– Grundsatz I
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Supervisory Recognition of Netting
Conditions:
 contractual netting agreement (internationally customary or
recommended by trade association)
 single payment obligation in the event of insolvency or payment
default
 mutual obligation
 incorporation of individual transactions
 validity and enforceability of netting agreement evidenced by
written and reasoned legal opinion from knowledgeable and
independent third party
• annual update
• submission to BAKred
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Legal Opinions
• Insolvency Law
 jurisdiction of headquarter
 jurisdiction of branches
• No Capacity Opinion
• Sponsors of Legal Opinions
 ISDA
 TBMA / ISMA
 Zentraler Kreditausschuß
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Collateral I
Reduction of Exposure which remains after Netting:
expanded use of credit lines
further reduction of capital requirements
Types of Collateral:
Cash
Government Bonds
Corporate Bonds
Shares
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Collateral II
Collateral Agreements:
ISDA
• Credit Support Annex (New York, English + Japanese Law)
• Credit Support Deed (English Law)
 AFB / FBF
• Annexe remise en garantie
Deutscher Rahmenvertrag für Finanztermingeschäfte
• Sicherheitenanhang (Deutsches Recht)
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