The International Swaps and Derivatives Association is looking to overhaul its 1992 master agreement as well as update credit and equity derivatives definitions for next year. The initiative is part of an ongoing effort to update ISDA documentation, which is used in the majority of over-the-counter transactions.
The new documentation "will provide a higher degree of credit protection for everyone in the market," according to Don Thompson, managing director and associate general counsel at J.P. Morgan in New York. For example, the draft revised master agreement suggests cutting the grace period for counterparties that fail to meet their obligations to one day instead of three, he said. The current master agreement was drawn up when most derivatives counterparties were highly rated entities, Thompson said. Now that derivatives use is more widespread the master agreement is deemed too debtor friendly. "Not all counterparties are AA rated now," he added.
Kimberly Summe, general counsel at ISDA in New York, said this process kicked off in earnest at a meeting two weeks ago to discuss the master agreement in New York and there was a similar meeting last week in London. Approximately 100 derivatives professionals attended both meetings. Members have until Jan. 7 to submit comments. "All members want to see this," said Summe.
The need to revise the master agreement was recently underscored by the collapse of Enron, J.P. Morgan's Thompson continued. Under the old master agreement the non-defaulting party has to obtain an independent mark-to-market value for each contract, which is cumbersome and time consuming, he said. However one proposal is to obtain a value for the forward curve and value the portfolio according to this.
Chip Goodrich, managing director in the legal department at Deutsche Bank in New York and North America co-chair of ISDA's documentation committee, said the new proposals should increase certainty and reduce systemic risk.
Over the course of 2002 working groups will produce drafts of the agreement, which will be sent out to committees of about 100 members, that will in turn send comments. "It's very labor and time intensive," noted Summe. She estimated that there will likely be over 40 drafts of the document. The new master agreement will incorporate all the supplements and commentaries the trade association has published since the 1992 agreement and will also look at other areas, such as set-off provisions and tax law changes.
ISDA is also looking to update its 1999 credit derivatives definitions next year to incorporate recent amendments, according to Summe. "We sent an e-mail this week requesting comment," she noted. Deutsche Bank's Goodrich added that the recent supplements on restructuring, convertibles and successor and credit events need to be woven into the definitions as well as address any other significant issues identified by the six-member working committees. "This will create greater clarity in credit derivatives definitions and products," added Goodrich. "This is a real positive," noted a credit derivatives marketer in New York.
The 1996 equity derivatives definitions are also on ISDA's list of documentation updates for next year, according to Summe. The guidelines, currently under review, will likely be released by July or August, and will incorporate a number of new products. The definitions will also examine the issue of market disruption in light of the Sept. 11 attacks, noted Summe. Stephen Kowitt, managing director of equity derivatives at J.P. Morgan and North America co-chair of ISDA's equity derivatives committee, said the committee is reviewing commentary from the markets and where needed will look to make definitions more compatible with market practice. He declined further comment.
