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LEARNING CURVE: ISDA's 2002 Master Agreement Protocol

With just three weeks to go until the scheduled deadline for adherence to the International Swaps and Derivatives Association's 2002 Master Agreement Protocol, now more than ever is the time for market participants to consider signing up.1

With just three weeks to go until the scheduled deadline for adherence to the International Swaps and Derivatives Association's 2002 Master Agreement Protocol, now more than ever is the time for market participants to consider signing up.1 This article will explain what the Protocol is, how it works and why even market participants who have not yet negotiated or entered into a 2002 Master Agreement can benefit.

The 2002 Master Agreement

It is now more than a year since ISDA published the 2002 Master and it is fair to say that it has yet to displace its 1992 predecessor as the standard master agreement used to document international over-the-counter derivatives relationships. Those who are not yet thinking about using the 2002 Master should be aware that we are seeing a trend developing in favour of the new agreement.

Many of the leading dealers have now completed (or soon will complete) the extensive internal review processes and preparations to enable them to use the new Master as a matter of course. Interestingly, many end-users, not burdened by the scale of derivatives operations that has until now held some dealers back, have been eager to use the new Master for some time. The floodgates might be about to open.

Although we are still in a period of transition, it is only a matter of time before the 21st century Master becomes the standard master agreement for a 21st century market--at least for new business. Undeniably, for all its virtues, the 1992 Master (which was published before many products, including credit derivatives, arrived on the scene) is showing its age. The 2002 Master, on the other hand, is the state of the art, reflecting lessons learned during periods of market stress over the past 10 years and important developments in litigation, legislation and market practice.  


Undoubtedly, market participants face logistical challenges in moving to the new Master, including developing policies and procedures for using it. One significant challenge arises not so much from the 2002 Master itself, but from the fact that much of ISDA's documentation library pre-dates the 2002 Master. It is this challenge, rather than the one of moving from the 1992 Master to the 2002 Master, that ISDA's latest Protocol can help to overcome.

More specifically, issues arise because documents published by ISDA before 2002 (including definitional booklets and credit support documents), which market participants would otherwise wish to use in connection with a 2002 Master, were drafted with the 1992 Master rather than the 2002 Master in mind. As a result, they contain a variety of provisions that have relevance in the context of a 1992 Master but not the 2002 document.

For example, many of ISDA's pre-2002 definitional booklets contain provisions that rely upon the use of the procedures of "market quotation" or "loss" to calculate a sum due between the parties on close-out of a transaction affected by a particular event or circumstance or as a valuation measure for other purposes. Both market quotation and loss are defined in the 1992 Master; neither is defined or has any particular relevance in the context of the 2002 agreement.

There is, therefore, potential for real ambiguity if these documents are used without modification in connection with a 2002 Master. Although parties are free to address the issues each time they use a pre-2002 ISDA document in connection with a 2002 Master (by including provisions in their confirmations or credit support arrangements, as the case may be), this requires care and commitment of resources. By far the safest and most efficient way to address the issues is by adhering to the Protocol.  

What Is The Protocol?

Published in July of last year, the 2002 Master Agreement Protocol is the youngest member of ISDA's Protocol family. ISDA started writing protocols in 1998 when it published its European Monetary Union Protocol, to which over 1,100 market participants adhered. The issues covered may be different, but the common feature of the Protocols is the multilateral mechanism they provide. This mechanism enables a party to address certain issues between itself and all other adherents to the Protocol through one simple act, thereby saving time and costs that would otherwise have to be spent in multiple bilateral negotiations.

Like other Protocols, the latest one includes a variety of standardised provisions contained in different annexes. The provisions in each of the latest Protocol's 18 annexes set out the terms of various amendments to one of ISDA's pre-2002 publications (see chart). The amendments represent modifications that parties would wish to make to that pre-2002 document if they were to use it in connection with a 2002 Master.

Each party that adheres to the Protocol selects the annexes it wishes to apply between it and other adhering parties with which it has entered or may enter into a 2002 Master. To the extent that the selections of any two adhering parties match, the selected provisions will apply as between those two parties if and when they use the relevant pre-2002 documents in connection with a 2002 Master. The provisions will not apply when the relevant pre-2002 documents are used in connection with any other form of agreement between them, including a 1992 Master.

Aside from the issues covered, the unique feature of the 2002 Master Agreement Protocol is that it is forward looking. All of ISDA's previous Protocols were designed to effect amendments only to master agreements (or, in one case, credit support documents) that had already been entered into between the parties. The new Protocol would be of limited use if it did nothing more than that, since the universe of executed 2002 Masters remains relatively small. So, the Protocol looks forward and caters both for the fact that some market participants have not yet entered into a 2002 Master and for the fact that even those who have already entered into a 2002 Master will enter into more in the future.

It does this by providing that the provisions selected by any two adhering parties will be effective not only with respect to 2002 Masters that have already been entered into between them, but also with respect to any 2002 Master subsequently entered into between them (whether before or after the end of the period for adherence). This forward looking approach enables the maximum number of market participants to take advantage of the limited opportunity offered by the Protocol. The more market participants that adhere, the greater the benefit they can achieve.  

How To Adhere

Adherence to the Protocol is straightforward. A party simply has to complete and sign a standard form letter indicating which of the 18 annexes it wishes to apply and send it, together with a conformed copy of the letter and a check for USD500, to ISDA.

A form of adherence letter is available on the Protocol section of ISDA's Web site (, along with the Protocol itself, answers to a set of frequently asked questions and supporting legal opinions on the enforceability of the protocol procedure under English and New York law, each provided by Allen & Overy. Also displayed on the Web site is a conformed copy of each adherence letter received by ISDA and a list of adhering parties, so that participants are able to keep track of adherence by other parties.


Time Is Running Out


As discussed above, the deadline for adherence to the Protocol is scheduled to pass on March 1. In addition to the time and cost savings offered by the multilateral mechanism of the Protocol, there are several other reasons to commend it. The standardised provisions in each annex result from widespread consultation among ISDA members and therefore reflect an industry consensus. It is comprehensive in terms of the range of pre-2002 documents covered. Parties can adhere even if they have yet to enter into a 2002 Master and even if they are not ISDA members. Bearing in mind how easy and inexpensive it is to adhere compared with the alternatives, the opportunity should not lightly be missed.

This week's Learning Curve was written by
Jeffrey Golden, partner, and John Berry, senior associate, both in the derivatives group at Allen & Overy in London.

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