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

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Presentation on theme: "International Swaps and Derivatives Association, Inc. Introduction to the 1992 ISDA Master Agreement Nacional Financiera Auditorium - Mexico City May 7,"— Presentation transcript:

1 International Swaps and Derivatives Association, Inc. Introduction to the 1992 ISDA Master Agreement Nacional Financiera Auditorium - Mexico City May 7, 2001 John P. Emert Assistant General Counsel Bank of America Emilio Jimenez Vice President and Assistant General Counsel JPMorgan Chase & Co.

2 2 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 Confirmations (Short Form)  Incorporate definitions  Specify economic terms of each transaction  Include any individual modifications 1998 FX and Currency Option Definitions 1991 Definitions  Specify payment calculations  Define floating rates in 20 currencies  Include provisions for swaps, caps, collars, floors, swap options and FRAs 1993 Commodity Derivatives Definitions 1994 Credit Support Annex (New York law) 1996 Credit Support Annex (Japanese law) 1996 Equity Derivatives Definitions 1999 Credit Derivatives Definitions EMU Protocol 1998 Supplement to the 1991 Definitions 1997 Bullion Definitions 1998 EURO Definitions 2000 Supplement to the 1993 Commodity Derivatives Definitions Credit Support Annex (English law) 1995 Credit Support Deed (English law) 2000 ISDA Definitions

3 3 Section 1 - Interpretation  Interpretive Priority  Single Agreement  Interpretive Priority  Single Agreement

4 4 Section 2 - Payment and Delivery Obligations  Conditions Precedent  Change of Account  Payment Netting  Tax Withholding/Gross-Up  Default Interest/Other Amounts  Conditions Precedent  Change of Account  Payment Netting  Tax Withholding/Gross-Up  Default Interest/Other Amounts

5 5 On-Going Netting - Section 2(c) (Not Close-out Netting) Party A Party A Net: $75 Party B Party B Gross: $100 Gross: $25

6 Section 3 - Representations  Purposes: Facilitate Due Diligence Establish Factual Underpinnings of Agreement  Remedies: Event of Default/Liquidation Agreement Measure of Damages/Other Remedies  Purposes: Facilitate Due Diligence Establish Factual Underpinnings of Agreement  Remedies: Event of Default/Liquidation Agreement Measure of Damages/Other Remedies 6

7 Section 3 - Representations (cont.)  Basic Representations  Absence of Certain Events  Absence of Litigation  Accuracy of Specified Information  Tax Representations  Additional Non-Standard Representations  Basic Representations  Absence of Certain Events  Absence of Litigation  Accuracy of Specified Information  Tax Representations  Additional Non-Standard Representations 7

8 8 Section 4 - Agreements  Purpose/Remedies  Furnish Specified Information  Maintain Authorizations  Comply with Laws  Tax Agreement  Payment of Stamp Tax  Purpose/Remedies  Furnish Specified Information  Maintain Authorizations  Comply with Laws  Tax Agreement  Payment of Stamp Tax

9 9 Events of Default 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 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 Section 5(a)

10 10 Default under Specified Transactions Specified Transactions (defined in Section 14) Specified Transactions (defined in Section 14) means derivatives transactions outside ISDA means derivatives transactions outside ISDA between between Specified Transactions (defined in Section 14) Specified Transactions (defined in Section 14) means derivatives transactions outside ISDA means derivatives transactions outside ISDA between between PARTY A Credit Support Provider Specified Entity PARTY B Credit Support Provider Specified Entity and Section 5(a)(v)

11 11 Cross Default  Default in respect of borrowed money  Threshold Amount  Default in respect of borrowed money  Threshold Amount Section 5(a)(vi)

12 12 BankruptcyBankruptcy  Insolvency-related events  Actual liquidation  Actions by a secured party  Insolvency-related events  Actual liquidation  Actions by a secured party Section 5(a)(vii)

13 13 Termination Events 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 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 Section 5(b)

14 Early Termination Reason Events of Default  Bankruptcy  Other Termination Event  Illegality  Tax Event Upon Merger  Tax Event  Credit Event Upon Merger  Additional Termination Event Reason Events of Default  Bankruptcy  Other Termination Event  Illegality  Tax Event Upon Merger  Tax Event  Credit Event Upon Merger  Additional Termination Event TERMINATION MECHANICS: How to Terminate 1992 ISDA Master Reference Sections 6(a) + (b); Pages ISDA Master Reference Sections 6(a) + (b); Pages 8-9 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) 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) only applies if elected in Schedule *only applies if elected in Schedule 14

15 15 Event of Default Credit Event Upon Merger Additional Termination Event Other Termination Events Event of Default Credit Event Upon Merger Additional Termination Event Other Termination Events Early Termination  all Transactions terminated (presumption)  only Affected Transactions TERMINATION MECHANICS: Effect of Termination 1992 ISDA Master Reference Section 6(c); Page ISDA Master Reference Section 6(c); Page 9

16 16 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) PlusUNPAID AMOUNTS owed to the determining party on or before the ETD LessUNPAID AMOUNTS owed by the determining party on or before the ETD. 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) PlusUNPAID AMOUNTS owed to the determining party on or before the ETD LessUNPAID AMOUNTS owed by the determining party on or before the ETD.

17 17 TimelineTimeline 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. 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. ThursdayMondayTuesdayThursdayMondayWednesdayFriday ThursdayMondayTuesdayThursdayMondayWednesdayFriday January 7January 11January 12January 14February 8February 10February 12 January 7January 11January 12January 14February 8February 10February 12 Swap 1Party A givesSwap 2 Party B’s Party A Early TerminationSwap 2 Swap 1Party A givesSwap 2 Party B’s Party A Early TerminationSwap 2 Payment Date:notice ofPayment Date:failure to pay designates Date. scheduled Payment Date:notice ofPayment Date:failure to pay designates Date. scheduled Party Bfailure toParty A wouldon January 7February 10 Also Swap Payment Date. Party Bfailure toParty A wouldon January 7February 10 Also Swap Payment Date. owes $150,000Party B.have owedbecomesas the Early 1 Payment Date: Party A owes $150,000Party B.have owedbecomesas the Early 1 Payment Date: Party A and fails $75,000. Event ofTermination Party B oweswould have and fails $75,000. Event ofTermination Party B oweswould have to pay. Default.Date. $100,000.owed $75,000. to pay. Default.Date. $100,000.owed $75,000. 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. 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. ThursdayMondayTuesdayThursdayMondayWednesdayFriday ThursdayMondayTuesdayThursdayMondayWednesdayFriday January 7January 11January 12January 14February 8February 10February 12 January 7January 11January 12January 14February 8February 10February 12 Swap 1Party A givesSwap 2 Party B’s Party A Early TerminationSwap 2 Swap 1Party A givesSwap 2 Party B’s Party A Early TerminationSwap 2 Payment Date:notice ofPayment Date:failure to pay designates Date. scheduled Payment Date:notice ofPayment Date:failure to pay designates Date. scheduled Party Bfailure toParty A wouldon January 7February 10 Also Swap Payment Date. Party Bfailure toParty A wouldon January 7February 10 Also Swap Payment Date. owes $150,000Party B.have owedbecomesas the Early 1 Payment Date: Party A owes $150,000Party B.have owedbecomesas the Early 1 Payment Date: Party A and fails $75,000. Event ofTermination Party B oweswould have and fails $75,000. Event ofTermination Party B oweswould have to pay. Default.Date. $100,000.owed $75,000. to pay. Default.Date. $100,000.owed $75,000.

18 18 Timeline (cont’d) 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. 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. 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.

19 19 Early Termination Payment Components Swap 1 Swap 2 Swap 1 Swap 2 Market Quotation (determined by Party A)$1,100,000($1,400,000) Unpaid Amounts payable to Party A 150, , ,000 Unpaid Amounts payable to Party B - 75,000 Components Swap 1 Swap 2 Swap 1 Swap 2 Market Quotation (determined by Party A)$1,100,000($1,400,000) Unpaid Amounts payable to Party A 150, , ,000 Unpaid Amounts payable to Party B - 75,000

20 20 Calculation Sum of Market Quotations$1,100,000 (Settlement Amount) (1,400,000) ($300,000) Plus Unpaid Amounts payable to Party A 150, , ,000250,000 Less Unpaid Amounts payable to Party B (75,000) (75,000) (75,000)($125,000)Calculation Sum of Market Quotations$1,100,000 (Settlement Amount) (1,400,000) ($300,000) Plus Unpaid Amounts payable to Party A 150, , ,000250,000 Less Unpaid Amounts payable to Party B (75,000) (75,000) (75,000)($125,000) Early Termination Payment

21 21 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 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

22 22 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) 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)

23 23...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 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

24 24 MultibranchMultibranch Party A (Frankfurt) (Frankfurt) Party B (Paris Branch) Party B (Paris Branch) Party B (London Head Office) Party B (London Head Office) Swap 1 Swap 2


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