Commerzbank AG 1

OTC - Master Agreements

RA Hermann Stahl

Central Legal Dept.

Frankfurt/Main

Commerzbank AG 2

Master Agreements - I

Which Products?

OTC Derivatives• Swaps• Caps, Floors, Collars• Options• FRA’s

Foreign Exchange Transactions

Securities Lending Transactions

Repurchase Transactions

Commerzbank AG 3

Master Agreements - II

National Master AgreementsDeutscher Rahmenvertrag für FinanztermingeschäfteAustrian, Swiss, Dutch and Spanish Master Agree-

ments

BBA Master Agreements IFEMA (FX only) ICOM (FX options only) FEOMA (FX and FX options)

Commerzbank AG 4

Master Agreements - III

International Master Agreements (cross-border)1992 ISDA Master Agreement (draft: 2002 ISDA

Master Agreement)PSA/ISMA Global Master Repurchase AgreementOSLA (Overseas Securities Lender‘s Agreement)AFB/FBF Convention-cadre relative aux opérations de

marché à terme

Commerzbank AG 5

Master Agreements - IV

European Banking FederationEMA = European Master Agreement (currently only

with annexes for repurchase and securities lending transactions; annex for derivatives under development)

The Bond Market Association Cross-Product Master Agreement

International Swaps and Derivatives Association Cross-agreement bridge (project)

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Master Agreements - V

Why Master Agreements?

simplification / standardization contractual framework Netting

• payment• close-out• insolvency• capital adequacy requirements• market risks

credit protection

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Structure

Master Agreement

Confirmation

Confirmation

Confirmation

Definitions

Definitions

Definitions

together: one single agreement

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Structure of1992 ISDA Master Agreement

Section 1 - 18: General

Schedule Part 1 - 4 (menue)

Schedule Part 5 - ___ (free choice)

Transaction (Swap)Confirmation

ISDA Definitions

1996 ISDA Equity Derivatives Definitions1997 ISDA Government Bond Option Def.1998 FX and Currency Option Definitions1998 ISDA Euro Definitions1999 ISDA Credit Derivatives Definitions2000 ISDA Definitions

Commerzbank AG 9

1992 ISDA Master Agreement I

Short summary of the most important provisions:

Sec. 1(c) Single Agreement Sec. 2(a) Conditions precedent (c) Payment netting (d) Gross-up (tax) Sec. 3 Representations Sec. 4 Agreements

Commerzbank AG 10

1992 ISDA Master Agreement II

Short summary of the most important provisions:

Sec. 5(a) Events of Default• (i) Failure to pay or deliver• (vi) Cross Default• (vii) Bankruptcy

Sec. 5(b) Termination Events• (i) Illegality• (iv) Credit Event upon Merger• (v) Additional Termination Event (Schedule)

Commerzbank AG 11

1992 ISDA Master Agreement III

Short summary of the most important provisions:

Sec. 6 Early Termination (close-out procedure)

• (a) Automatic Termination• (b) Termination upon Notice• (e) Calculation Method

– First Method („Walk Away“)– Second Method (Full Two Way Payment)– Market Quotation / Loss / Replacement Value under discussion

Commerzbank AG 12

1992 ISDA Master Agreement IV

Short summary of the most important provisions:

Sec. 9(e) Confirmations

Sec. 12 Notices

Sec. 13 Governing Law (New York or English Law), Jurisdiction: New York or England

Sec. 14 Definitions

Commerzbank AG 13

1992 ISDA Master Agreement- Schedule I -

Part 1: Termination Provisions

Specified Entity (e.g. Affiliates) Cross Default (Threshold) Credit Event upon Merger Automatic Termination Market Quotation or Loss Termination Currency

Commerzbank AG 14

1992 ISDA Master Agreement- Schedule II -

Part 2: Tax Representations

Part 3: Documents to be Delivered• signature list, Board Resolution, abstract from register,

Articles of Association, annual report, capacity legal opinion

Part 4: Miscellaneous• (a) Addresses for Notices• (b) Process Agent (affiliate or special company)• (d) Multibranch Party• (h) Governing Law (New York, English Law)

Commerzbank AG 15

1992 ISDA Master Agreement- Schedule III -

Part 5: Other Provisions (free choice)

Example:

• Incorporation of ISDA Definitions

• Set-off clause (obligations from other contracts)

• Relationship between Parties:– Non-Reliance– No Agency

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1992 ISDA Master Agreement- Confirmation -

Content of a Confirmation:

reference to (existing) master agreement

reference to applicable ISDA Definitions

special provisions

details of the transaction

Commerzbank AG 17

Netting- Overview -

1. Payment Netting

(settlement netting)

2. Novation Netting

3. Close-out Netting

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BA

Payment Netting

EUR-Interest Rate-Swap

floating fixed

Payment Date 1

3,5

3,5

(3,75)

net

10,25

(14)

3

Payment Date 4

Payment Date 3

Payment Date 2

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Novation Netting

FX Forwards

Novation on 25.06.1999:A pays 5 Euro, B pays 5,1 USD on 29.11.1999

Euro USD

USD Euro

10 10,6

5,5 5

26.05.1999

25.06.1999

29.11.1999

A B

A B

Commerzbank AG 20

Close-out Netting

Single Agreement

Master Agreement Transactions1. +4 MtM-value in favour of A2. –2 MtM-value in favour of A3. +1 MtM-value in favour of A4. +2 MtM-value in favour of A5. –1 MtM-value in favour of A6. +3 MtM-value in favour of A

Settlement Amount: + 7 MtM-value in favour of A + 2 unpaid amounts B

+ 0,2 interest on unpaid amounts B ./. 1 unpaid amounts A ./. 0,1 interest on unpaid amounts A

Sum: + 8,1 Close-out Amount (claim of A against B)

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Reduction of Credit Risk- Overview -

Supervisory Recognition of Netting

Novation Netting (BIZ 1988)

Close-out Netting• EU-Directive of 1996• Implementation in Germany:

– GroMiKV– Grundsatz I

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Supervisory Recognition of Netting

Conditions:contractual netting agreement (internationally customary or

recommended by trade association) single payment obligation in the event of insolvency or payment

defaultmutual obligation incorporation of individual transactionsvalidity and enforceability of netting agreement evidenced by

written and reasoned legal opinion from knowledgeable and independent third party

• annual update

• submission to BAKred

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Legal Opinions

• Insolvency Law jurisdiction of headquarter jurisdiction of branches

• No Capacity Opinion

• Sponsors of Legal Opinions ISDATBMA / ISMAZentraler Kreditausschuß

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Collateral I

Reduction of Exposure which remains after Netting:expanded use of credit linesfurther reduction of capital requirements

Types of Collateral:CashGovernment BondsCorporate BondsShares

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Collateral II

Collateral Agreements:

ISDA• Credit Support Annex (New York, English + Japanese Law)• Credit Support Deed (English Law)

AFB / FBF• Annexe remise en garantie

Deutscher Rahmenvertrag für Finanztermingeschäfte• Sicherheitenanhang (Deutsches Recht)