HMRC internal manual

Corporate Finance Manual

CFM13100 - Understanding corporate finance: derivatives: documentation: the ISDA Master Agreement

The ISDA Master Agreement

The ISDA Master Agreements are updated occasionally. Currently (as at the beginning of 2019) the 2002 revision is still in use. There are two forms of the ISDA Master Agreement: a general multicurrency agreement and a simpler version for use in transactions where there is no international element; the former is often used to allow additional flexibility.

The documentation consists of the Master Agreement itself, which sets out the basic terms and conditions, and a Schedule to the agreement, which sets out any particular terms the parties agree will apply to transactions between them. A company entering into a master agreement with a particular counterparty will need to negotiate the terms of the schedule, although many banks and other derivatives professionals have their own standard forms of schedule.

If you want to know the full contractual terms governing any particular derivatives transaction, you will need to look at the master agreement, the schedule and the confirmation of that particular transaction.

In law, all transactions which two parties enter into under a master agreement will generally constitute a single contract. Each time a new transaction takes place, a new contract is created which assumes all previous unsettled deals - a process of novation (see CFM11170). This means that if one party defaults on a transaction, it is essentially regarded as defaulting on all transactions. Otherwise, if one party was owed money under transaction A but was due to make a payment under transaction B, it would be legally obliged to make the payment under transaction B even if it never received the money under transaction A.

The ISDA Master Agreement allows payments between the parties to be netted off, even where there is no default, provided the payments are due on the same date and in the same currency. This applies across transactions, as well as to payments in respect of the same transaction.


A company enters into two swaps (X and Y) with the same bank. Under the terms of swap X, the company is due to pay the bank £100,000 on 31 March. On the same day, the bank is due to pay the company £150,000 under the terms of swap Y. The bank can make a net payment

A company which becomes party to an OTC contract may have to provide collateral (which may be cash, or some negotiable instrument such as bonds). ISDA publishes two standard credit support documents, the Credit Support Deed and the Credit Support Annex. Both allow one party to call for cash or other collateral from the other if the mark to market value of the transaction falls below a certain amount - an arrangement rather like the payment of margin on exchange-traded contracts.

Under the Credit Support Deed, the counterparty does not own and cannot use the margin, but has a legal charge over it, which can be enforced if there is a default. The Credit Support Annex, on the other hand, provides that title to the margin passes to the counterparty. So if there is a default, the counterparty can net off the amount of collateral it holds against what it is owed under the contract.