RA Hermann Stahl

1
OTC - Master Agreements

• RA Hermann Stahl
• Central Legal Dept.
• Frankfurt/Main

2
Master Agreements - I

• Which Products?
• OTC Derivatives
• Swaps
• Caps, Floors, Collars
• Options
• FRAs
• Foreign Exchange Transactions
• Securities Lending Transactions
• Repurchase Transactions

3
Master Agreements - II

• National Master Agreements
• Deutscher Rahmenvertrag für Finanztermingeschäfte
• Austrian, Swiss, Dutch and Spanish Master
  Agree-ments
• BBA Master Agreements
• IFEMA (FX only)
• ICOM (FX options only)
• FEOMA (FX and FX options)

4
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 Lenders Agreement)
• AFB/FBF Convention-cadre relative aux opérations
  de marché à terme

5
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)

6
Master Agreements - V

• Why Master Agreements?
• simplification / standardization
• contractual framework
• Netting
• payment
• close-out
• insolvency
• capital adequacy requirements
• market risks
• credit protection

7
Structure
Master Agreement
Confirmation
Definitions
Definitions
Confirmation
Confirmation
Definitions

• together one single agreement

8
Structure of1992 ISDA Master Agreement
Section 1 - 18 General
Schedule Part 1 - 4 (menue)
Schedule Part 5 - ___ (free choice)
ISDA Definitions
Transaction (Swap) Confirmation
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
9
1992 ISDA Master Agreement I

• Short summary of the most important provisions
• Sec. 1(c) Single Agreement
• Sec. 2(a) Conditions precedent
• (c) Payment netting
• (d) Gross-up (tax)
• Sec. 3 Representations
• Sec. 4 Agreements

10
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)

11
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

12
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

13
1992 ISDA Master Agreement- Schedule I -

• Part 1 Termination Provisions
• Specified Entity (e.g. Affiliates)
• Cross Default (Threshold)
• Credit Event upon Merger
• Automatic Termination
• Market Quotation or Loss
• Termination Currency

14
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
• (a) Addresses for Notices
• (b) Process Agent (affiliate or special company)
• (d) Multibranch Party
• (h) Governing Law (New York, English Law)

15
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

16
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

17
Netting- Overview -

• 1. Payment Netting
• (settlement netting)
• 2. Novation Netting
• 3. Close-out Netting

18
Payment Netting
EUR-Interest Rate-Swap
A
B
floating
fixed
Payment Date 1
3
3,5
Payment Date 2
3,5
Payment Date 3
(14)
10,25
(3,75)
Payment Date 4
net
19
Novation Netting
FX Forwards
A
B
10
10,6
26.05.1999
Euro
USD
A
B
5,5
5
25.06.1999
USD
Euro
29.11.1999
Novation on 25.06.1999 A pays 5 Euro, B pays 5,1
USD on 29.11.1999
20
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 8,1 Close-out Amount (claim
  of A against B)

21
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

22
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

23
Legal Opinions

• Insolvency Law
• jurisdiction of headquarter
• jurisdiction of branches
• No Capacity Opinion
• Sponsors of Legal Opinions
• ISDA
• TBMA / ISMA
• Zentraler Kreditausschuß

24
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

25
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)