Traditionally, most hedge funds have traded their ISDA master agreements on the defensive; They shall endeavour to limit the circumstances which could enable their counter-party to enter into trades following an event of default or termination. While hedge fund counterparties face particular challenges in trading against highly rated traders, they should strive to avoid overly broad provisions that could expose them to unnecessary default scenarios. In addition, in the context of today`s volatile markets, where “even the powerful have fallen”, all participants in the derivatives market must take into account that the solvency of a counterparty can deteriorate seriously, unexpectedly and quickly and that they may have to negotiate all their trade agreements with a new set of assumptions. Second, maintaining a small staff may be penny, but stupid. The inability to enter into ISDA framework contracts with new counterparties due to a lack of staff may result in missed negotiation opportunities. Most multinational banks have ENTERed into ISDA framework contracts. These agreements generally apply to all branches operating in the context of currency, interest rate or option trading. Banks require counterparties to sign swap agreements. Some also require agreements for foreign exchange transactions. While the ISDA Framework Agreement is the norm, some of its conditions are modified and defined in the attached timetable. The schedule is negotiated to cover either (a) the requirements of a given hedging transaction or (b) an ongoing business relationship. Due to the continuing legal uncertainty and credit risk in the OTC market, ISDA framework contracts are likely to continue to be difficult to negotiate. However, the prevention of unnecessary delays in the conclusion of these agreements pays off.
Speeding up negotiations of ISDA framework agreements could pave the way for even more profitable trade between the parties. The derivatives trading relationship between a hedge fund and a trader may also cover prime brokerage services, portfolio lending, redemption and securities lending operations. If so, the documentation requested by the concessionaire consists, in addition to an ISDA framework contract, of the agreements covering those other relationships. Whether other agreements already exist between the trader and the hedge fund when the ISDA framework contract is negotiated or the ISDA contract is only one agreement among others negotiated at the beginning of a new trading relationship, the conformity between similar provisions must be assessed in all agreements and provisions applicable in the event of disagreement. The hedge fund will gain nothing if, for example, its carefully crafted provisions in ISDA contracts are repealed by provisions contained in a premium brokerage contract. The parties shall endeavour to limit this liability by including in their agreements “non-reliance” insurance, so that each does not rely on the other and makes its own independent decisions. . .
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