A master transaction agreement is a contract reached between two parties in a financial transaction in which the parties agree to most of the terms that will govern future transactions. Many master transaction agreements are standardized and most are bilateral.
Financial service institutions often agree to Master Transaction Agreements, specifying terms such as the types of transactions to be covered, credit limits, margin requirements for open positions, delivery, failure of delivery and other default, clearing and settlement, dispute resolution, and the like. Under the Master Transaction Agreement, individual transactions can be negotiated in seconds—the traders only need to agree to the security, the quantity, and the price. Most master agreements are bilateral, one pair of firms per agreement.
Most exchanges and electronic communication networks (ECNs) require member firms or customers to enter a “Trading Agreement,” a contractions that sets out the obligations and rights of the exchange and one particular firm or customer. Each executed trade is typically a separate contract, with an obligation to deliver cash in one direction and securities in the other, with most terms of the single-trade contract controlled by the master agreement.
ISDA’s “Master Agreement” for OTC Derivatives
In over-the-counter (OTC) derivative markets, two parties form an agreement using a unique contract designed to mitigate a specific risk. See Understanding Derivatives: Markets and Infrastructure for more details.
To help facilitate the process of creating OTC contracts, the International Swaps and Derivatives Association (ISDA) created a “Master Agreement” to act as a template. The template helps parties expedite the procedure and allows netting provisions to allow the parties to calculate their bilateral financial exposure.
- ^* Understanding Derivatives: Markets and Infrastucture Federal Reserve Bank of Chicago, Financial Markets Group
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.