International Swaps and Derivatives Association, Inc. Introduction to the 1992 ISDA Master Agreement Nacional Financiera Auditorium - Mexico City May 7, 2001

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International Swaps and Derivatives Association,
Inc.Introduction to the 1992 ISDA Master
AgreementNacional Financiera Auditorium -
Mexico CityMay 7, 2001
John P. Emert Assistant General Counsel Bank of
America
Emilio Jimenez Vice President and Assistant
General Counsel JPMorgan Chase Co.
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ISDA Agreement Structure (2001)
1997 Government Bond Option Definitions

• 1992 Master Agreement
• (Multicurrency-Cross Border)
• Sets master agreement structure
• Incorporates Confirmations
• Includes representations, events
• of default/termination events
• and covenants
• Specifies early termination
• provisions
• Schedule used to make changes
• to standard provisions

1994 Credit Support Annex (New York law)

1998 FX and Currency Option Definitions
1995 Credit Support Annex (English law)

• 1991 Definitions
• Specify payment calculations
• Define floating rates in 20
• currencies
• Include provisions for swaps, caps, collars,
  floors, swap options and FRAs

1996 Credit SupportAnnex (Japanese law)
1995 Credit SupportDeed (English law)

• Confirmations (Short Form)
• Incorporate definitions
• Specify economic terms of each transaction
• Include any individual modifications

1998 Supplement to the 1991 Definitions
1999 Credit Derivatives Definitions
2000 ISDA Definitions
1993 Commodity Derivatives Definitions
1998 EURO Definitions
2000 Supplement to the 1993 Commodity Derivatives
Definitions
1996 Equity Derivatives Definitions
1997 Bullion Definitions
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Section 1 - Interpretation

• Interpretive Priority
• Single Agreement

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Section 2 - Payment and Delivery Obligations

• Conditions Precedent
• Change of Account
• Payment Netting
• Tax Withholding/Gross-Up
• Default Interest/Other Amounts

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On-Going Netting - Section 2(c)(Not Close-out
Netting)
Gross 100
Party A
Party B
Net 75
Gross 25
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Section 3 - Representations

• Purposes Facilitate Due Diligence
• Establish Factual Underpinnings of Agreement
• Remedies Event of Default/Liquidation
• Agreement Measure of Damages/Other Remedies

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Section 3 - Representations (cont.)

• Basic Representations
• Absence of Certain Events
• Absence of Litigation
• Accuracy of Specified Information
• Tax Representations
• Additional Non-Standard Representations

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Section 4 - Agreements

• Purpose/Remedies
• Furnish Specified Information
• Maintain Authorizations
• Comply with Laws
• Tax Agreement
• Payment of Stamp Tax

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Events of Default
Section 5(a)

• Section 5(a)(i) Failure to Pay or Deliver
• Section 5(a)(ii) Breach of Agreement
• Section 5(a)(iii) Credit Support Default
• Section 5(a)(iv) Misrepresentation
• Section 5(a)(v) Default under Specified
  Transactions
• Section 5(a)(vi) Cross Default
• Section 5(a)(vii) Bankruptcy
• Section 5(a)(viii) Merger Without Assumption

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Default under Specified Transactions
Section 5(a)(v)

• Specified Transactions (defined in Section
  14)
• means derivatives transactions outside ISDA
• between

PARTY B Credit Support Provider Specified Entity
PARTY A Credit Support Provider Specified Entity
and
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Cross Default
Section 5(a)(vi)

• Default in respect of borrowed money
• Threshold Amount

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Bankruptcy
Section 5(a)(vii)

• Insolvency-related events
• Actual liquidation
• Actions by a secured party

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Termination Events
Section 5(b)

• Section 5(b)(i) Illegality
• Section 5(b)(ii) Tax Event
• Section 5(b)(iii) Tax Event Upon Merger
• Section 5(b)(iv) Credit Event Upon Merger
• Section 5(b)(v) Additional Termination Event

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Early Termination
TERMINATION MECHANICS How to Terminate

• Who may terminate
• Non-defaulting Party or Automatic
• Non-defaulting Party
• either party
• Burdened Party
• Affected Party
• non-Affected Party
• non-Affected Party or either party (if there are
  two Affected Parties)

• Reason
• Events of Default
• Bankruptcy
• Other
• Termination Event
• Illegality
• Tax Event Upon Merger
• Tax Event
• Credit Event Upon Merger
• Additional Termination Event

1992 ISDA Master Reference Sections 6(a) (b)
Pages 8-9
only applies if elected in Schedule
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Early Termination
TERMINATION MECHANICS Effect of Termination

• Event of Default
• Credit Event Upon Merger
• Additional Termination Event
• Other Termination Events

• all Transactions terminated
• all Transactions terminated
• all Transactions terminated
• (presumption)
• only Affected Transactions

1992 ISDA Master Reference Section 6(c) Page 9
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Early Termination Payment

• Components
• SETTLEMENT AMOUNT net value of amounts (based
  on Market Quotation or Loss) which would have
  been payable under each Terminated Transaction
  after the Early Termination Date (ETD) had
  there not been an ETD (this may be owed by or to
  the determining party)
• Plus UNPAID AMOUNTS owed to the determining
  party on or before the ETD
• Less UNPAID AMOUNTS owed by the determining
  party on or before the ETD.

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Timeline

• The following diagram gives an example of how
  certain payments would fall within Unpaid Amounts
  and how others would fall within Market Quotation
  where there are two swaps and Party B is the
  Defaulting Party.
• Thursday Monday Tuesday Thursday Monday Wednesday
  Friday
• January 7 January 11 January 12 January
  14 February 8 February 10 February 12
• Swap 1 Party A gives Swap 2 Party Bs Party A
  Early Termination Swap 2
• Payment Date notice of Payment Date failure to
  pay designates Date. scheduled
• Party B failure to Party A would on January
  7 February 10 Also Swap Payment Date.
• owes 150,000 Party B. have owed becomes as the
  Early 1 Payment Date Party A
• and fails 75,000. Event of Termination
  Party B owes would have
• to pay. Default. Date. 100,000. owed
  75,000.

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Timeline (contd)
Unpaid Amounts includes amount Party B failed to
pay on January 7. includes amount Party A did not
have to pay on January 12 (failure to satisfy
condition precedent that there be no Event of
Default or Potential Event of Default). includes
the payment scheduled for February 10 (would
have been payable on Early Termination
Date). excludes the payment scheduled for
February 12 even though portion of relevant
calculation period has run as of Early
Termination Date.
Market Quotation includes discounted value of
payment scheduled for February 12, as well as
replacement value (based on Market Quotations) of
all subsequent payments due under Swaps 1 and 2.
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Early Termination Payment

• Components
• Swap 1 Swap 2
• Market Quotation
• (determined by Party A) 1,100,000 (1,400,000)
• Unpaid Amounts
• payable to Party A 150,000 -
• 100,000
• Unpaid Amounts
• payable to Party B - 75,000

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Early Termination Payment

• Calculation
• Sum of Market Quotations 1,100,000
• (Settlement Amount)
  (1,400,000)
• (300,000)
• Plus Unpaid Amounts payable to Party A
  150,000
• 100,000
• 
  250,000
• Less Unpaid Amounts payable to Party B
  (75,000)
• (75,000)
• (125,000)

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Early Termination Payment

• Result
• if First Method is chosen no payment is due to
  either party
• if Second Method is chosen Party A pays 125,000
  to Party B

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Early Termination Payment

• Possible Combinations
• Events of Default
• First Method/Market Quotation
• First Method/Loss
• Second Method/Market Quotation
• Second Method/Loss
• Termination Events
• Market Quotation (One Affected Party)
• Loss (One Affected Party)
• Market Quotation (Two Affected Parties)
• Loss (Two Affected Parties)

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...And last but not (necessarily) least

• Section 7 - Transfer
• Section 8 - Contractual Currency
• Section 9 - Miscellaneous
• Section 10 - Multibranch
• Section 11 - Expenses
• Section 12 - Notices
• Section 13 - Governing Law
• Section 14 - Definitions
• Testimonium
• Signature blocks

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Multibranch
Party B (London Head Office)
Swap 1
Party A (Frankfurt)
Party B (Paris Branch)
Swap 2