Simplifying Derivative Transactions through ISDA Master Agreement 2002

 
Fathan Qorib, Robert Sidauruk
 
Derivative transactions are now a common financial arrangement between business, but remain difficult to understand as they generally involve complex variable and sophisticated economic structures.  
 
To simplify the pre-contractual process, many businesses chose to use the International Swaps and Derivatives Association (ISDA) Master Agreement 2002, as a “template” contract. Using this document also helps to reduce the possibility of vague terms and misinterpretations between the contracting parties.
 
Arie Armand, a partner at DNC Advocates at Work, explained that while derivative transactions are complicated, the provide protection to businesses from exposure to financial risks from contingencies such as exchange rate fluctuations.
 
“Let says a loan transaction is subject to a certain interest rate. The debtors may suffer losses if the interest rate is increased at a future date. Given the similar circumstances, debtors may take protective measures using a derivative transaction mechanism known as hedging by paying a fixed amount to a counterparty,” explained Mr. Armand during a full-day training on Legal Aspect of the ISDA Master Agreement 2002 organized by Hukumonline in Jakarta on Tuesday,
 
On a global scope, Mr. Armand explained, there are many master agreements that can be used by businesses to reduce common pre-contractual complexities. One of the most commonly used documents is the ISDA Master Agreement 2002.
 
Although the main purposes of ISDA Master Agreement 2002 is to provide simplicity to parties in derivative transactions, it requires in-depth expertise and knowledge to understand how the master agreement will operate and how it will affect parties to the contract.
 
Complete understanding of the ISDA Master Agreement 2002, Arie continued, is crucial knowledge as it has become the most common master agreement of its type used internationally.
 
“Parties to the ISDA Master Agreement 2002 or lawyers on their behalf must understand every term in the master agreement as to how it will affect them. The content of the ISDA Master Agreement 2002 itself its quite complicated,” added Mr. Armand.
 
The ISDA Master Agreement 2002 is comprised of three main parts, the master agreement itself, the schedule, and confirmations. The master agreement section sets out provisions on interpretation, definitions, obligations of the parties, transferring funds, taxes, events of default and early termination.
 
The schedule outlines the agreement of both parties to comply with the master agreement and any necessary modifications made to it fit the specific transaction. Last, the confirmations section is for any specific individual provisions that will apply to a given transaction under the master agreement.
 
(hot/kc)