ISDA Agreement Negotiation

Negotiate the Terms First, and Then Negotiate the Price

Each new interest rate swap or interest rate cap agreement is negotiated under the framework of an ISDA Agreement, which consists of a Master Agreement, Schedule, and Confirmation.

  • The Master Agreement is a standard agreement used by every bank that defines terms, notices, remedies, and so forth. There is no negotiation of terms in the Master Agreement.
  • The Schedule is a rider to the Master Agreement, and it defines optional terms applicable to the bank or the borrower. The Schedule articulates contract terms regarding default, early termination, downgrade provisions, transfers, and tax provisions.  All of these terms are negotiable; therefore, it is critical for a borrower have experienced representation, in order to negotiate the most advantageous terms in the Schedule.
  • The Confirmation describes the economic details of an individual interest rate swap transaction. DAG will make certain that the Confirmation accurately matches the terms of the transaction that was negotiated, and that there are no errors or undefined terms.

Before entering into an ISDA Agreement, contact DAG to help negotiate the terms that align with your particular objectives.


Four Key Negotiating Points

When entering into an ISDA Agreement it is important to consider what may happen if terms are modified.  At inception, a swap has no value.  However, over time, the market value of a swap will change to the benefit of one of the two parties.  Below are four important issues that should be negotiated prior to executing the agreement.


  • Termination Risk – If interest rates decline after an interest rate swap is signed, you will be paying a higher rate than if you had waited.  In this case, if you want to cancel the swap, a Termination Value must be paid.  The Termination Value would also have to be paid in event of a default.  Depending on the terms of the agreement, the Termination Value can be expensive.Mitigation:  The borrower needs to be comfortable with the fixed rate selected, understanding that it is virtually impossible to “pick the bottom” of the interest rate market.  Involuntary termination events should be limited in the agreement, or a Cancellation Clause should be negotiated (see below).
  • Bank Credit Risk – There is a risk the bank may default on its obligations under the interest rate swap.  If this occurs, the borrower loses the swap, which may have considerable value.Mitigation:  Make sure to select a highly rated counterparty, and include downgrade provisions in the agreement.
  • Mismatching of Terms – The variable rate cash flow the borrower receives from the swap should match the amount and the timing of the loan payments.  The length of the swap should also match the length of the underlying loan.  Mismatching could negatively impact the borrower’s financial statements.Mitigation: Cash flows from the swap and underlying loan should be as closely matched as possible in both amount and timing, as provided in the agreement.
  • Cancellation Clause – Over time, the value of the swap changes, and it is a zero-sum game with a winner and a loser.  The loser will have to pay a charge/penalty cost to the other party if the swap is terminated.Mitigation:  In anticipation of a possible future interest rate swap cancellation, provisions can be negotiated to terminate the interest rate swap for either no payment or a predefined payment to the other party.