CDP Documentation & Clearing Infrastructure 1 — Questions and Answers
Question 1: Which document establishes the master terms and conditions governing all OTC derivatives transactions between two counterparties?
- FIA Master Agreement
- ISDA Master Agreement (Correct answer)
- GMRA Master Agreement
- ICMA Framework Agreement
Correct 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.
Question 2: Which of the following is NOT a standard component of a typical ISDA documentation package?
- ISDA Master Agreement
- Schedule to the Master Agreement
- Trade Confirmation
- Exchange Membership Agreement (Correct answer)
Correct 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.
Question 3: Under an ISDA Master Agreement, 'close-out netting' upon a counterparty default allows the non-defaulting party to:
- Net all outstanding transactions to a single payment obligation (Correct answer)
- Net only trades executed on the same business day
- Net only trades denominated in the same currency
- Net trades only with prior written consent from both parties
Correct 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.
Question 4: A 'Confirmation' in OTC derivatives documentation primarily serves to:
- Document the specific economic terms of each individual trade (Correct answer)
- Replace the ISDA Master Agreement for large notional transactions
- Establish the credit limit for a new counterparty relationship
- Confirm that a trade has been submitted to a trade repository
Correct 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.
Question 5: The 'Schedule' to an ISDA Master Agreement primarily serves to:
- List all completed transactions in chronological order
- Elect and modify standard provisions of the Master Agreement (Correct answer)
- Describe the collateral held by a custodian for each party
- Enumerate all required regulatory filings for each trade
Correct 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.
Question 6: Section 5 of the ISDA Master Agreement addresses which critical topic?
- Payment obligations and delivery
- Tax representations and indemnities
- Events of Default and Termination Events (Correct answer)
- Multibranch party elections
Correct 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.
Question 7: Under 'full two-way payment' upon close-out of an ISDA Master Agreement, which of the following is true?
- Both parties pay or receive based on market values regardless of which party defaulted (Correct answer)
- Only the non-defaulting party is entitled to receive any close-out payment
- Payments are split equally between the defaulting and non-defaulting parties
- The defaulting party forfeits all in-the-money positions automatically
Correct 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.
CDP Documentation & Clearing Infrastructure 1
Which document establishes the master terms and conditions governing all OTC derivatives transactions between two counterparties?