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OTC - Master Agreements

RA Hermann Stahl Central Legal Dept. Frankfurt/Main. OTC - Master Agreements. Master Agreements - I. Which Products? OTC Derivatives Swaps Caps, Floors, Collars Options FRA’s Foreign Exchange Transactions Securities Lending Transactions Repurchase Transactions.

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OTC - Master Agreements

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  1. RA Hermann Stahl Central Legal Dept. Frankfurt/Main OTC - Master Agreements

  2. Master Agreements - I • Which Products? • OTC Derivatives • Swaps • Caps, Floors, Collars • Options • FRA’s • Foreign Exchange Transactions • Securities Lending Transactions • Repurchase Transactions

  3. Master Agreements - II • National Master Agreements • Deutscher Rahmenvertrag für Finanztermingeschäfte • Austrian, Swiss, Dutch and Spanish Master Agree-ments • BBA Master Agreements • IFEMA (FX only) • ICOM (FX options only) • FEOMA (FX and FX options)

  4. Master Agreements - III • International Master Agreements (cross-border) • 1992 ISDA Master Agreement (draft: 2002 ISDA Master Agreement) • PSA/ISMA Global Master Repurchase Agreement • OSLA (Overseas Securities Lender‘s Agreement) • AFB/FBF Convention-cadre relative aux opérations de marché à terme

  5. Master Agreements - IV • European Banking Federation • EMA = European Master Agreement (currently only with annexes for repurchase and securities lending transactions; annex for derivatives under development) • The Bond Market Association • Cross-Product Master Agreement • International Swaps and Derivatives Association • Cross-agreement bridge (project)

  6. Master Agreements - V • Why Master Agreements? • simplification / standardization • contractual framework • Netting • payment • close-out • insolvency • capital adequacy requirements • market risks • credit protection

  7. Structure Master Agreement Confirmation Definitions Definitions Confirmation Confirmation Definitions • together: one single agreement

  8. Structure of1992 ISDA Master Agreement Section 1 - 18: General Schedule Part 1 - 4 (menue) Schedule Part 5 - ___ (free choice) ISDA Definitions Transaction (Swap) Confirmation 1996 ISDA Equity Derivatives Definitions 1997 ISDA Government Bond Option Def. 1998 FX and Currency Option Definitions 1998 ISDA Euro Definitions 1999 ISDA Credit Derivatives Definitions 2000 ISDA Definitions

  9. 1992 ISDA Master Agreement I • Short summary of the most important provisions: • Sec. 1(c) Single Agreement • Sec. 2(a) Conditions precedent • (c) Payment netting • (d) Gross-up (tax) • Sec. 3 Representations • Sec. 4 Agreements

  10. 1992 ISDA Master Agreement II • Short summary of the most important provisions: • Sec. 5(a) Events of Default • (i) Failure to pay or deliver • (vi) Cross Default • (vii) Bankruptcy • Sec. 5(b) Termination Events • (i) Illegality • (iv) Credit Event upon Merger • (v) Additional Termination Event (Schedule)

  11. 1992 ISDA Master Agreement III • Short summary of the most important provisions: • Sec. 6 Early Termination (close-out procedure) • (a) Automatic Termination • (b) Termination upon Notice • (e) Calculation Method • First Method („Walk Away“) • Second Method (Full Two Way Payment) • Market Quotation / Loss / Replacement Value under discussion

  12. 1992 ISDA Master Agreement IV • Short summary of the most important provisions: • Sec. 9(e) Confirmations • Sec. 12 Notices • Sec. 13 Governing Law (New York or English Law), Jurisdiction: New York or England • Sec. 14 Definitions

  13. 1992 ISDA Master Agreement- Schedule I - • Part 1: Termination Provisions • Specified Entity (e.g. Affiliates) • Cross Default (Threshold) • Credit Event upon Merger • Automatic Termination • Market Quotation or Loss • Termination Currency

  14. 1992 ISDA Master Agreement- Schedule II - • Part 2: Tax Representations • Part 3: Documents to be Delivered • signature list, Board Resolution, abstract from register, Articles of Association, annual report, capacity legal opinion • Part 4: Miscellaneous • (a) Addresses for Notices • (b) Process Agent (affiliate or special company) • (d) Multibranch Party • (h) Governing Law (New York, English Law)

  15. 1992 ISDA Master Agreement- Schedule III - • Part 5: Other Provisions (free choice) • Example: • Incorporation of ISDA Definitions • Set-off clause (obligations from other contracts) • Relationship between Parties: • Non-Reliance • No Agency

  16. 1992 ISDA Master Agreement- Confirmation - • Content of a Confirmation: • reference to (existing) master agreement • reference to applicable ISDA Definitions • special provisions • details of the transaction

  17. Netting- Overview - • 1. Payment Netting • (settlement netting) • 2. Novation Netting • 3. Close-out Netting

  18. Payment Netting EUR-Interest Rate-Swap A B floating fixed Payment Date 1 3 Payment Date 2 3,5 Payment Date 3 3,5 (14) 10,25 Payment Date 4 (3,75) net

  19. Novation Netting FX Forwards A B 26.05.1999 10 10,6 Euro USD A B 25.06.1999 5,5 5 USD Euro 29.11.1999 Novation on 25.06.1999: A pays 5 Euro, B pays 5,1 USD on 29.11.1999

  20. Close-out Netting • Single Agreement • Master AgreementTransactions • 1. +4 MtM-value in favour of A • 2. –2 MtM-value in favour of A • 3. +1 MtM-value in favour of A • 4. +2 MtM-value in favour of A • 5. –1 MtM-value in favour of A • 6. +3 MtM-value in favour of A • Settlement Amount: + 7 MtM-value in favour of A • + 2 unpaid amounts B • + 0,2 interest on unpaid amounts B • ./. 1 unpaid amounts A • ./. 0,1 interest on unpaid amounts A • Sum: + 8,1 Close-out Amount (claim of A against B)

  21. Reduction of Credit Risk- Overview - • Supervisory Recognition of Netting • Novation Netting (BIZ 1988) • Close-out Netting • EU-Directive of 1996 • Implementation in Germany: • GroMiKV • Grundsatz I

  22. Supervisory Recognition of Netting • Conditions: • contractual netting agreement (internationally customary or recommended by trade association) • single payment obligation in the event of insolvency or payment default • mutual obligation • incorporation of individual transactions • validity and enforceability of netting agreement evidenced by written and reasoned legal opinion from knowledgeable and independent third party • annual update • submission to BAKred

  23. Legal Opinions • Insolvency Law • jurisdiction of headquarter • jurisdiction of branches • No Capacity Opinion • Sponsors of Legal Opinions • ISDA • TBMA / ISMA • Zentraler Kreditausschuß

  24. Collateral I • Reduction of Exposure which remains after Netting: • expanded use of credit lines • further reduction of capital requirements • Types of Collateral: • Cash • Government Bonds • Corporate Bonds • Shares

  25. Collateral II • Collateral Agreements: • ISDA • Credit Support Annex (New York, English + Japanese Law) • Credit Support Deed (English Law) • AFB / FBF • Annexe remise en garantie • Deutscher Rahmenvertrag für Finanztermingeschäfte • Sicherheitenanhang (Deutsches Recht)

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