1. OTC - Master Agreements
RA Hermann Stahl
Central Legal Dept.
Frankfurt/Main
Commerzbank AG

2. Master Agreements - I Which Products? OTC Derivatives
Swaps
Caps, Floors, Collars
Options
FRA’s
Foreign Exchange Transactions
Securities Lending Transactions
Repurchase Transactions
Commerzbank AG

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)
Commerzbank AG

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 Lender‘s Agreement)
AFB/FBF Convention-cadre relative aux opérations de marché à terme
Commerzbank AG

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)
Commerzbank AG

6. Master Agreements - V Why Master Agreements?
simplification / standardization
contractual framework
Netting
payment
close-out
insolvency
capital adequacy requirements
market risks
credit protection
Commerzbank AG

7. Structure Master Agreement Confirmation Definitions Definitions
together: one single agreement
Commerzbank AG

8. Structure of 1992 ISDA Master Agreement
Section : General
Schedule Part (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
Commerzbank AG

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
Commerzbank AG

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)
Commerzbank AG

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
Commerzbank AG

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
Commerzbank AG

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
Commerzbank AG

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)
Commerzbank AG

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
Commerzbank AG

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
Commerzbank AG

17. Netting - Overview - 1. Payment Netting (settlement netting)
2. Novation Netting
3. Close-out Netting
Commerzbank AG

18. Payment Netting EUR-Interest Rate-Swap A B floating fixed (14) 10,25
Payment Date 1 3
Payment Date 2
3,5
Payment Date 3
3,5
(14)
10,25
Payment Date 4
(3,75)
net
Commerzbank AG

19. Novation Netting FX Forwards Novation on 25.06.1999:B 10
10,6
Euro
USD A B
5,5 5
USD
Euro
Novation on :
A pays 5 Euro, B pays 5,1 USD on
Commerzbank AG

20. Close-out Netting Single Agreement
Master Agreement Transactions
MtM-value in favour of A
2. –2 MtM-value in favour of A
MtM-value in favour of A
MtM-value in favour of A
5. –1 MtM-value in favour of A
MtM-value in favour of A
Settlement Amount: MtM-value in favour of A
unpaid amounts B
+ 0,2 interest on unpaid amounts B
./ unpaid amounts A
./. 0,1 interest on unpaid amounts A
Sum: ,1 Close-out Amount (claim of A against B)
Commerzbank AG

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
Commerzbank AG

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
Commerzbank AG

23. Legal Opinions Insolvency Law No Capacity Opinion
jurisdiction of headquarter
jurisdiction of branches
No Capacity Opinion
Sponsors of Legal Opinions
ISDA
TBMA / ISMA
Zentraler Kreditausschuß
Commerzbank AG

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
Commerzbank AG

25. Collateral II Collateral Agreements: ISDA AFB / FBF
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)
Commerzbank AG