Swaps Documenation is handled differently depending on how the contract is cleared.
Cleared Derivatives: Swap Documenation will be
- Clearing Agreement Futures Agreement w/ OTC Addendum
Agreement between clearinghouse and clearingmember
- Give-up Agreement
Agreement between final client and clearing member firm
Covers execution and submission of swaps
- There may be collateral agreements between final client and clearing member firm
Bilateral Derivatives: Swap Documentation will be:
- The confirmation
Will be sent out by swap dealer, signed and returned by counterparty
Confirm includes the economic terms of the trade
Confirm can also include additional terms (.i.e, mutual break cloauses, etc.)
- The ISDA Master Agreement
Contains term common to all counterparties
- Schedule A Is considered part of the ISDA MAster Agreement, where all unique terms agreed to between the counterparties are placed
Credit Even Upon Merger
Agreement to Deliver Documents
Certificates of Incorporation
Certificates of Incumbency
Board Resolutions – allowing the use of derivatives
Legal Opinion from corporate auditors
Security Pledges, Guarantees, etc. related to credit support
For example: if a counterparty had a bank loan and a swap, the bank would incorporate the securites agreement and the loan document into the ISDA so that a common set of default provisions would apply to the loan and the swap, and security would be available to support both exposures.
Other Provisions: Set-Off
Additional Terms for FX Transactions & Currency Options
- The Standard Collateral Support Annex
The largest change is the Collateral Support Annex (CSA). Before, these were highly customized agreements reflecting the relative opinoins of the two institutions. Again, will depend on the country booking the swap, but will be a STANDARDIZED contract.
The SCSA take the place of the CSA, changing several key elements:
Zero threshold and zero transfer minimum (aka mark-to-market daily)
Eliminate Collateral switch options
Align interest accruals on cash collateral
- Swap Execution Facilities (SEF)
- In the U.S.: this will be the Standard Collateral Support Annex (SCSA)
- When a Bilateral Swap trades through a Swap Execution Facility (SEF) all trade details are automatically generated.
- A reference number for each swap is created to identify each swap. All other economic and legal terms of the swap are included in the confirmation. Confirmations are sent eleectronically over a SSL, signed by an authorized signatory and returned to the respective counterparty.
- You can learn all about SEF’s here
- The GMRA (Repo Agreement) in order to post repo as collateral will be signed between the counterparty and the bank.
- The purpose of the repo is to post collateral in a secured form.