Lessons from the ISDA Master Agreement
Yesterday during a sponsorship-related lunch with the New York Times Company I was lucky enough to be seated across from General Counsel and Vice President Kenneth Richieri. I mentioned to him my interest in this social contract system, and he had a a number of noteworthy tips from his legal and finance experience. Among them, he mentioned an organization called the ISDA that publishes and maintains a very important document called the the ISDA Master Agreement. This agreement is the standardized template contract used in OTC derivative trading. Universal acceptance of this contract vastly reduces transaction costs for traders, resulting in increased market efficiency. From their site:
The ISDA Master Agreement, the authoritative contract widely used by industry participants, represents a milestone achievement because it has established international contractual standards governing privately negotiated derivatives transactions that reduce legal uncertainty and allow for reduction of credit risk through netting of contractual obligations.
After reading up on finance to get most of my terminology straight, I’m renewing my interest in these sorts of streamlined contracts. How can we take what ISDA has done for derivatives and apply it to the diverse and dynamic contracts and agreements used by individuals and small businesses? There are technical and design issues of course, but fundamentally much of the challenge lies in the crafting of a trusted, accepted organization.
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