The 1992 master agreement is a legal document that established the International Swaps and Derivatives Association (ISDA) as the primary trade organization for the over-the-counter derivatives market. It is considered a landmark document and has played a significant role in the growth and development of derivatives trading.
The agreement was first signed on April 14, 1992, and has since been updated several times to reflect changes in the market and regulatory landscape. The primary purpose of the agreement was to provide a standardized framework for trading derivatives, which had been largely unregulated prior to its creation.
One of the key features of the 1992 master agreement is its use of standard legal language and definitions for key terms. This helped to reduce ambiguity and confusion in the derivatives market, making it easier for participants to understand and agree on the terms of their trades.
Another important aspect of the agreement was its inclusion of netting provisions. Netting allows parties to offset their obligations to each other, which can help to reduce risk and improve liquidity in the market. The use of netting also makes it easier to manage credit risk by allowing parties to calculate their exposure to each other more easily.
The 1992 master agreement has also been credited with helping to spur the growth of the derivatives market by providing a more efficient and standardized way of trading. By reducing the complexity and uncertainty of the trading process, the agreement helped to attract more participants to the market, which in turn helped to increase liquidity and reduce costs.
While the 1992 master agreement has been widely praised for its contribution to the derivatives market, it has also faced criticism for its role in the financial crisis of 2008. Many critics argue that the complex and opaque nature of derivatives trading, as well as the use of off-balance-sheet transactions, contributed to the crisis and the resulting economic downturn.
Despite these criticisms, the 1992 master agreement remains an important document in the history of derivatives trading. Its standardized framework and provisions have helped to make the market more efficient and transparent, and it continues to serve as a model for other trade organizations and agreements.