One of the obstacles to promoting the use of the 2002 ISDA Master Agreement (the "2002 Agreement")is the fact that many of the definitions and credit support documents published before 2002 by the International Swaps and Derivatives Association, Inc. ("ISDA") are not compatible with the 2002 Agreement without amendment.
In order to enable users of the 2002 Agreement to make the necessary amendments to such documents efficiently, ISDA published the 2002 Master Agreement Protocol on 15th July, 2003 (the "Protocol") following widespread industry consultation supported by English and New York legal opinions. The Protocol has 18 Annexes, each relating to a separate definitions or credit support document published by ISDA before 2002 and containing all of the amendments that will need to be made to such documents to make them compatible with the 2002 Agreement.
Annex 1 : 1991 ISDA Definitions
Annex 2 : 1998 Supplement to the 1991 ISDA Definitions
Annex 3 : 2000 ISDA Definitions
Annex 4 : 1992 ISDA FX and Currency Option Definitions
Annex 5 : 1998 FX and Currency Option Definitions
Annex 6 : 1993 ISDA Commodity Derivatives Definitions
Annex 7 : 2000 Supplement to the 1993 ISDA Commodity Derivatives Definitions
Annex 8 : 1994 ISDA Equity Option Definitions
Annex 9 : 1996 ISDA Equity Derivatives Definitions
Annex 10 : 1997 ISDA Government Bond Option Definitions
Annex 11 : 1997 ISDA Bullion Definitions
Annex 12 : 1997 ISDA Short Form Bullion Definitions
Annex 13 : 1999 ISDA Credit Derivatives Definitions
Annex 14 : 1994 ISDA Credit Support Annex (Bilateral Form; ISDA Agreements Subject to New York Law Only)
Annex 15 : 1995 ISDA Credit Support Annex (Bilateral Form Transfer; ISDA Agreements Subject to English Law)
Annex 16 : 1995 ISDA Credit Support Deed (Bilateral Form - Security Interest; ISDA Agreements Subject to English Law)
Annex 17 : 1995 ISDA Credit Support Annex (Bilateral Form - Loan and Pledge; Security Interest Subject to Japanese Law)
Annex 18 : 2001 ISDA Margin Provisions
The major advantage of the Protocol is that it minimizes the need for users that have adhered to the Protocol to negotiate amendments to pre-2002 ISDA definitions and credit support documents on a transaction-by-transaction basis.
A user wishing to adhere to the Protocol (whether or not an ISDA member) should complete an adherence letter in the form set out in the Protocol (the "Adherence Letter") and deliver the same to ISDA, as agent, on or before the relevant cutoff date (currently 1 March,2004, the "Cutoff Date"). Users will be precluded from adhering to the Protocol after the Cut-off Date (unless the deadline is extended by ISDA).
A user may choose to adopt all or some of the Annexes (without negotiating the terms) by delivering the Adherence Letter to ISDA. The Adherence Letter becomes effective upon receipt by ISDA. The amendments in each Annex adopted by a user (each, an "Adhering Party") will be deemed to apply to all future transactions among Adhering Parties although, as between any two Adhering Parties, only those Annexes which have been adopted by each such party in their Adherence Letter ("Matched Annexes") will apply to all existing or future 2002 Agreements (including all related transactions and credit support documents) between the parties. A full list of Adhering Parties and the Annexes adopted by them is available on ISDA ’s website.
As more counterparties adhere to the Protocol, a substantial multilateral amendment network will be generated prompting increased use of the 2002 Agreement. Generally, major market players will be more interested in adhering to the Protocol as they have larger portfolios and the Annexes will save the time and expense of negotiating amendments to pre-2002 documents on a transaction-by-transaction basis. On the other hand, the Protocol may not be very attractive to smaller entities, particularly if it is unlikely that their usual counterparties will adhere to the Protocol. As at 15 January,2004, there were only 18 Adhering Parties. As the number of Adhering Parties will be fixed after the Cut-off Date, making the Protocol a closed system, it is hoped that ISDA will exercise its discretion pursuant to the Protocol to extend the adherence period if the number of Adhering Parties does not substantially increase as the Cut-off Date approaches.
The Protocol has a number of inherent limitations. As mentioned above, it only applies if both parties to a 2002 Agreement are Adhering Parties, and its application in such case will be restricted to the Matched Annexes adopted by each such party. In addition, the Protocol does not cover ISDA’s standard form "bridges" (such as the 2001 Cross-Agreement Bridge) and long-form confirmation templates, as they tend to be tailor-made in each case and involve more changes to ISDA ’s standard provisions. In other words, Adhering Parties cannot avoid negotiation completely by adopting the Protocol.
The major benefit of the Protocol may ultimately prove to be that it is a useful method for non-Adhering Parties to highlight the necessary changes to the pre-2002 ISDA documents in order to make them compatible with the 2002 Agreement. Until ISDA has updated all of its publications for the purpose of the 2002 Agreement, the Annexes to the Protocol will serve as an invaluable reference for all users of the 2002 Agreement beyond the Cut-off Date.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
