Documentation & Clearing Infrastructure Flashcards

Which document establishes the master terms and conditions governing all OTC derivatives transactions between two counterparties?

Answer: ISDA Master Agreement

The ISDA Master Agreement is the industry-standard legal document that governs OTC derivatives transactions, providing a single agreement framework for all trades between counterparties.

Which of the following is NOT a standard component of a typical ISDA documentation package?

Answer: Exchange Membership Agreement

An ISDA package consists of the Master Agreement, Schedule, Confirmations, and an optional Credit Support Annex; an Exchange Membership Agreement belongs to an exchange-traded environment.

Under an ISDA Master Agreement, 'close-out netting' upon a counterparty default allows the non-defaulting party to:

Answer: Net all outstanding transactions to a single payment obligation

Close-out netting terminates all outstanding transactions and calculates a single net payment, significantly reducing the credit exposure of the non-defaulting party.

A 'Confirmation' in OTC derivatives documentation primarily serves to:

Answer: Document the specific economic terms of each individual trade

A Confirmation records the specific economic terms of each trade (notional, maturity, rate, settlement dates) and supplements the overarching ISDA Master Agreement.

The 'Schedule' to an ISDA Master Agreement primarily serves to:

Answer: Elect and modify standard provisions of the Master Agreement

The Schedule allows counterparties to customize the standard ISDA Master Agreement by electing specific provisions and adding bespoke terms suited to their commercial and legal relationship.

Section 5 of the ISDA Master Agreement addresses which critical topic?

Answer: Events of Default and Termination Events

Section 5 enumerates Events of Default (failure to pay, bankruptcy, cross-default) and Termination Events that can trigger early termination of all transactions.

Under 'full two-way payment' upon close-out of an ISDA Master Agreement, which of the following is true?

Answer: Both parties pay or receive based on market values regardless of which party defaulted

Full two-way payment ensures that if the defaulting party is owed money on net, it (or its estate) still receives payment, reflecting the true economic value of outstanding trades.