An ISDA negotiator plays a key part in arranging agreements under which two parties can trade derivatives. Derivatives and other financial products are commonly traded on Exchanges, but they’re also traded in direct relationships between banks, funds and corporations – this is known as the ‘Over the Counter’ (OTC ) derivatives market.
What is the ISDA?
The term ISDA stands for ‘International Swaps and Derivatives Association.’ The ISDA is a global organisation that maintains an industry standard for the trading of OTC derivatives and aims to reduce legal and credit risk.
The ISDA has developed a Master Agreement and other documents that serve as templates for agreements between institutions governing the trading of derivatives and related financial products. In practice, organisations usually customise the ISDA Master Agreement template to suit their preferences and the nature of the deal.
Enter the ISDA Negotiator
Each party looking to enter a trading agreement will bring one or more negotiators to hash out the details. There are often a few key points to be customised, negotiated and agreed upon.
Each party will have terms it prefers; the negotiator’s job is to get the most favourable terms for the organisation he represents included in the agreement. The negotiator aims to tailor the agreement according to the particular credit risk management stance of his party – for example, if his bank is fairly conservative, he will aim to minimise the possible size of unsecured credit lines to the other party.
The main concern of most organisations involved in OTC derivatives trades is counter-party risk. Because OTC derivatives are not traded through an Exchange, each party involved will be concerned with whether or not the other party can adhere to the trade agreement and avoid defaulting.
This plays a big part in the negotiator’s role; based on the party’s assessment of the counter-party risk, coupled with their own risk management stance, the negotiator must push for favourable provisions in the case of the other party defaulting. The priority is to reach an agreement that protects the represented organisation sufficiently should the worst case scenario arise.
Negotiator Skills and Background
ISDA negotiators aren’t required to be fully qualified lawyers, although legal training is an advantage. Generally, an ISDA negotiator’s background includes specialised training and an extensive knowledge of the financial products involved in the trade. The negotiator needs to be skilled at getting the stipulations of his party into the contract, and at swiftly reaching an agreement with the other party so that key trades can take place.
An ISDA negotiator provides an essential service in the creation of an OTC derivative trading relationship. A good negotiator can ensure a trade agreement that suits a party’s goals and risk tolerance, and create a firm foundation for profitable trading.
About Author: Abigail Harding, Managing Director, joined DDL in June 2008. She has 2 years’ credit derivatives confirmations and one year’s middle office experience in structured credit derivatives for a large American investment bank. Since joining DDL she has worked on a number of in-house and outsourced assignments relating to ISDA negotiator and CSA negotiation. She has also provided training on credit derivatives documentation.