The International Swaps and Derivatives Association (ISDA) has released its 2002 Master Agreement, a widely used standardized contract for the derivatives trading industry, with several modifications designed to reflect changes in the industry over the last decade.

ISDA also is in the process of working with the Edison Electric Institute (EEI) and the North American Energy Standards Board (NAESB) to include power and gas documents, or annexes, to the master agreement. The power and gas annexes are expected to be completed sometime in the first quarter.

ISDA General Counsel Kimberly Summe said although ISDA is just getting started on the gas documents, the power side is much further along. She said the power annex will have defined terms in it and defined payment responsibilities and delivery responsibilities. “It allows people who already have an ISDA master agreement in place to go ahead and add power trading to their master agreement so that they can take advantage of the netting underneath that.”

ISDA is the global trade association representing leading participants in the privately negotiated derivatives industry, a business which includes interest rate, currency, commodity, credit and equity swaps, as well as related products such as caps, collars, floors and swaptions. ISDA numbers over 575 member institutions from 44 countries on six continents. Many of those members have a growing presence in the energy marketplace with the growth of OTC trading and the transformation of the energy trading business since the fall of Enron.

“I think for our membership in particular, this will be a quite useful tool to add to their arsenal because if you are a company that already has trading relationships with counterparties on derivatives to be able to add power and gas — if you are someone like Goldman Sachs — it will be a pretty useful mechanism for you,” said Summe.

She said the energy annexes to the master agreement will be entirely new documents. There are documents currently published by EEI and NAESB. EEI has a standard purchase and sale of electricity agreement, for example. But the new documents will forge a clearer link between the derivatives and energy industry, creating greater efficiency and ease of business.

“We’re working with EEI because we want to make sure that it not only works for our members but that it doesn’t contradict or supercede anything that EEI is doing. It’s the same concept with NAESB,” she said. “We are not trying to replace the documentation that these organizations have. We are trying to add a complement for our members who already trade on the basis of an ISDA master, so they can now expand the products that they cover to power and gas in North American.”

ISDA’s widely used master contract, currently governs derivative agreements between counterparties, including netting, and can be used to document a wide variety of transactions. The agreement also contains a set of definitions, and is designed to foster legal certainty and help lower credit risk. The changes made to it include a provision for force majeure termination that offers parties the flexibility to terminate transactions impacted by certain events beyond their control, and several new provisions dealing with defaults.

The vast majority of derivatives transactions executed annually are documented under the ISDA master. The agreement was last updated in 1992 and originally published in 1987. The 2002 agreement was the product of a two-year effort that included hundreds of individuals representing firms from all market sectors and geographic regions.

ISDA CEO Robert Pickel called the document a “milestone in the association’s efforts on behalf of its global membership to reduce risk and to promote practices conducive to the efficient conduct of the derivatives business. It also strengthens the ability of market participants to more effectively manage risk amidst the continuing growth and development of the derivatives industry.”

The association also released the 2002 ISDA equity derivatives definitions. Both the master agreement and the derivatives definitions are available on ISDA’s web site (www.isda.org).

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