05 Apr 2007

2006 ISDA Definitions

by Belinda Bible, Louise McCoach

A revised edition of the ISDA definitions has been published.

The International Swap and Derivatives Association ("ISDA") has recently published the 2006 ISDA Definitions containing improvements and updates which widen the range of transactions that can be efficiently documented under ISDA Master Agreements using a common set of terms.

Market participants should regard the 2006 ISDA Definitions as more of a nip and tuck than a complete facelift of the 2000 ISDA Definitions. The changes are neither radical nor controversial, the main aims being to reflect changes in market practice, to simplify and clarify the definitions used, to reduce the potential for disputes between counterparties and to introduce structural changes to the document layout.

Some of the more significant changes in the 2006 ISDA Definitions are:

  • new and amended definitions for Day Count Fractions;
  • new provisions for Arrears Setting transactions;
  • modifications to the Rate Option definitions;
  • more detailed procedures for obtaining quotes from Reference Banks;
  • new discounting conventions for Australian and New Zealand dollar Forward Rate Agreements;
  • an entirely new section dealing with Mark-To-Market Currency Swaps;
  • simplification of the Settlement Rate definition;
  • definitions and provisions to enable participants to document swaption straddle transactions; and
  • changes to the Settlement Matrix applicable to swaptions and early termination swaps.

ISDA also has plans to publish a new matrix, the 2006 ISDA Definitions MTM Matrix for Mark-to-Market Currency Swaps. Once published, the Matrix will enable ISDA to expand the definitions applicable to Mark-to-Market Currency Swaps in the 2006 ISDA Definitions, including the addition of new reference rates and source pages from time to time.

It is important to note that the 2006 ISDA Definitions do not automatically apply. Counterparties are still free to use the 2000 ISDA Definitions if they do not want to switch over.

At this stage, ISDA has no plans to publish a User's Guide in relation to the 2006 ISDA Definitions.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.