Derivatives and ISDA Documentation: Introduction to Legal Aspects

Course overview

Derivatives have become a vital tool in risk management, asset management and structured financings. The global market is huge, and not only banks and financial institutions but also commercial companies are regular participants.

Derivatives are legally and economically complex instruments. The recent financial crises and insolvencies of major players have caused shock waves, and there has already been much litigation. To protect all parties, transactions must be properly documented.

Lawyers and documentation staff need to understand the products, the legal issues, and effective documentation techniques.

The first part of this course gives an introduction to derivatives – what they are, how they work and why people use them. It also considers some of the things that have gone wrong and caused litigation.

In the second part there will be a review of the key provisions of the standard OTC market documents produced by ISDA.

Course content

Part 1 – Introduction to derivatives

Introduction

• Nature of derivatives
• Underlying assets, rates, indices
• Over-the-counter contracts vs exchange-traded products

Types of derivative

• Swaps (interest; currency)
• Caps, floors, collars
• Swaptions
• Options
• Futures and forwards
• Commodity derivatives
• Equity derivatives
• Credit derivatives

Uses and purposes of derivatives

• Price risk management (hedging)
• Credit risk management
• Arbitrage / access to other markets
• Gain exposure to asset or sector
• Change profile/nature of asset
• Synthetic assets, CDOs
• Speculation

What can go wrong?

• Legal risks; Hammersmith & Fulham
• Suitability/misselling; Bankers Trust v Dharmala and other cases
• Insolvency; Lehman Brothers

The future?

• Proposed regulatory reforms for OTC; central clearing; move to exchanges

Part 2 – ISDA documentation

Introduction

• What ISDA is and what it does
• Standardisation of terms
• Documentation structure

The ISDA Master Agreement – key features

• Single contract for all trades
• Netting on termination
• Reciprocity of provisions
• Governing law
• 1992 and 2002 versions
• User’s Guide

The ISDA Master Agreement – detailed review

• Payments
• Netting
• Payment pre-conditions; recent cases such as Firth Rixson
• Representations
• Undertakings
• Events of Default and Termination Events
• Settlement payment on early termination
• Transfer

Schedule to the Master Agreement

• Function
• Selection of options
• Addition of provisions

Confirmations

• How trades are done
• Forms of confirmation

ISDA Definitions

Credit enhancement

• Guarantees
• Credit Support Deed
• Credit Support Annex

What our clients are saying about the course

“Clear concise presentation, it was clear the presenter is an expert and he has a great presentation style”

"Great overview of ISDA and how the documents work"

“Hand-out notes are very detailed and were expanded on. The exercises were good for consolidation”