What is a Master Swap Agreement?

Master swap agreement refers to a contract that is standardized established in 1980s by the International Derivatives Association. It can also be defined as an agreement either made or is yet to be made between the borrower and the bank that comprise an ISDA Master Agreement. In other words, it identifies both of the two parties who plan to enter into a transaction. It also gives a description of terms and conditions included in the agreement like payment, default and termination events, and other agreements legalities.

How Does a Master Swap Agreement Work?

When you sign a master swap agreement, it is an indication that the two parties are willing to enter into a transaction which involves exchange of cash flow for a given period of time. Since all other legal terms are already stipulated in the agreement, the parties only discuss terms that will be involved in the financial transaction. Examples of financial terms that must be discussed at this point include terms such as the rates and maturity of the transaction. There is also signing of a master swap agreement to make it easier for the parties to take part in any other transaction separate from the initial agreement in the future. This is important because those other transactions may be in one way or the other based on the original agreement.