Whilst the ISDA Master Agreement (“ISDA”) is standardised, it can and should be customised bilaterally to fit your business needs, strategy and credit profile. Once in place, the ISDA doesn’t have a termination date. It governs the entire portfolio of trades and transactions throughout your over-the counter (“OTC”) counterparty relationship.
When you think about the lifecycle of your business, you can probably break it into distinctive phases and stages, each uniquely unpredictable, with its own challenges and managed by different teams of people. Your ISDAs don’t automatically upgrade to reflect the bespoke nature of the journey your business is on. Unless you make a conscious effort to maintain and review the terms periodically, you are running a risk of being held to redundant or obsolete representations and triggers that were put in place at outset of your OTC trading relationship.
Here are my top three reasons to dust off and review your existing ISDAs:
1. Net Asset Value (“NAV”) Declines. Historically, dealers have insisted on adding various triggers linked to NAV declines to hedge fund trading agreements. Today, this ISDA Additional Termination Event (“ATE”) acts as an early warning mechanism and allows the dealers to the take various actions from reducing exposure, calling for additional collateral to closing out the entire relationship. While tailored approach is required in the context of different fund sizes, trading strategies etc., it is likely that less favourable NAV triggers were proposed to you at the outset of the ISDA relationship where no trading record was available. The question is whether these NAV tiggers are still appropriate for your business today and reflect the current industry standard? Consider reviewing and updating where needed to avoid potential issues with dealers over NAV breaches, which can lead to trade terminations or waiver letters having to be issued.
2. Key Man Provisions. It is very common for dealers to request key men clauses in the ISDAs entitling them to terminate the agreement should the nominated person (or persons) decide to leave and / or their roles change. Same as in respect of the NAV triggers, the wording of this ATE provision may have become obsolete over time. Is the person that was the brains behind the trading strategy still within the organisation? Even if so, are they still involved in the day-to-day management and / or key investment decisions? Consider reviewing the wording to ensure that it is still fit for purpose!
3. Dispute Rights. The Calculation Agent (“CA”) dispute rights is one of the most frequently negotiated terms of the ISDA. The role of the CA is to determine settlement amounts owed between the parties. Generally, the dealer will appoint itself as the CA. However, how much discretion it has to determine the calculations, the scope of its powers in an event of default and ability to appoint alternative calculation agents is all a matter of negotiation. Also, do not forget about the most frequently neglected piece of the ISDA puzzle – the Confirmation, which has the magical ability to override your negotiated ISDA terms. For your dispute rights to kick in, you need the CA Confirmation language to be aligned with your ISDA. Checking if appropriate dispute provisions are in place can ensure that you get a seat at the table when decisions are made.
Finally, if you’re an investment manager with multiple funds under management, the consistency of terms across your ISDAs will have an impact on your overall legal and counterparty risk assessments. Even if you’re certain that all your ISDAs are in good shape, do you have an up-to-date ISDA policy that any new joiners can benefit from and auditors can review?
By investing in good ISDA templates and ensuring regular maintenance, you will not only be able to accelerate the on-boarding procedure and achieve a quicker time to market, but you will also protect your business from any potential, unnecessary breaches and unexpected triggers.
If you’d like any assistance with your ISDA agreements or have any questions about this article, please feel free to email me at firstname.lastname@example.org.
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