International Swaps and Derivatives Association (ISDA)

What is ISDA?

The International Swaps and Derivatives Association is a private trade association with members including banks, major financial institutions, government entities, private businesses, law firms, and other interested parties. ISDA has been in operation since 1985, promoting safety and improving efficiency in trading swaps and derivatives. 

The association establishes rules for how companies and banks create derivative contracts with each other. It developed a standardised agreement, known as the ISDA Master Agreement, to function as a template for swap traders. 

What are derivatives?

Derivatives are financial contracts where the value can be based on a specific factor, such as interest rates, stocks, currencies, or credit. They share similarities with insurance based on what may happen in the market. 

Why is ISDA important?

Before ISDA was established, there wasn’t a standard way for businesses to securely make complex deals. This led to increased risk and confusion. The ISDA Master Agreement is a standard contract that makes it easier and safer to trade, reduces legal confusion, and ensures everyone clearly understands the rules. ISDA operates in a complex area of finance, making things fair, simple, and organised. 

Example

Two banks want to make a deal about interest rates. Before ISDA, they would have had to write a new contract from scratch. However, the ISDA Master Agreement makes the deal move faster and makes it clearer, more secure, and reliable for both parties.