The New ISDA 2002 Master Agreement
The International Swaps and Derivatives Association, Inc announced the
publication of the 2002 Master Agreement, the successor to the 1992
(Multicurrency-Cross Border) Master Agreement. The effort to revise the 1992
Master Agreement was started by ISDA in early 1999 (through the Strategic
Documentation Review) in respect of certain key aspects of the ISDA
documentation. The review led to the publication of various standard form
amendments to the 1992 Master Agreement (e.g. close-out, illegality and
force majeure) and ended with the publication of the 2002 Master Agreement.
The use of the 2002 Master Agreement is not mandatory and so far, there has
not been a rush to adopt it.
The structure of the Master Agreement has remained unchanged. However,
there have been changes in the detail of some provisions. This article
highlights some of the more important changes (but shall not be taken as an
- a new “Close-out Amount” replaces the use
of “Market Quotation” and
- new “Force Majeure Event” and
Other amendments include:
- inclusion of Set-off provision
- amendments to Event of Default
- deletion of the “First Method”
- a new interest provisions that include ‘default’ interest
Market Quotation (i.e. quotations from reference dealers) and Loss
(i.e. a party’s own estimation of its losses) were used in the 1992
Master Agreement as measures of the payment to be made by a party to the
other if Early Termination Date is designated. These terms are replaced with
a single Close-out Amount in the 2002 Master Agreement. In addition, the
Determining Party is now (if she was not previously) expected to act in good
faith and use commercially reasonable procedures. Section 14 contains a long
list of information that the Determining Party may take into account to help
her to act in good faith and use commercially reasonable procedures. This
information includes quotations, relevant market data received by the
Determining Party from external sources or available from internal sources.
Commercially reasonable procedures include valuation models used in the
Determining Party’s course of business in valuing similar transactions
with unrelated counterparties. Different valuation models may be used
depending on e.g. the type, complexity and size of the Terminated
Transactions. Costs or other losses may be taken into account as long as
there is no duplication in the calculation.
Force Majeure Event
A new Termination Event, Force Majeure Event, has been introduced into
the 2002 Master Agreement. It addresses the occurrence of events beyond the
fault of the parties such as an act of state which prevents the performance
in accordance with the agreement. The 2002 Master Agreement also introduces
the concept of a Waiting Period which prevents the parties
from terminating the Affected Transaction unless performance remains
unlawful, impossible or impractical after the expiration of the Waiting
Period. The Waiting Period is 8 Local Business Days in respect of Force
Majeure Event and 3 Local Business Day in respect of Illegality.
It appears that the First Method is now rarely used and a decision has
been taken to remove the same from the 2002 Master Agreement.
The 2002 Master Agreement now contains complicated provisions addressing
compensation for default in deliveries and payment depending on the
circumstances of default.
Although the 1992 Master Agreement does not have a set-off clause, most
parties would include such a provision in the Schedule. This change merely
reflects such a practice.
Event of Default
The grace period for failure to pay or deliver has been reduced to one
Local Business Day (in the case of a payment) and one Local Delivery Day (in
the case of a delivery) from the previous three Local Business Days.
Repudiation of Agreement (which includes the Master Agreement, a
Confirmation or a Transaction) has been added to 5(a)(ii) as an Event of
Default. “Specified Transaction” has been
expanded to include new types of transactions in case there is any doubt
whether these are covered by the definition in the 1992 Master Agreement.
Cross Default (Section 5(a)(vi)) has also been amended to the effect that
the amounts in respect of (a) default resulting in acceleration and (b)
failure to pay when due may be aggregated in determining the Threshold
If you would like to discuss any of the above, please do not hesitate to
contact us at [email protected].