ISDA stands for the International Swaps and Derivatives Association, but in CRE practice “the ISDA” refers to the ISDA Master Agreement: the standardized legal framework that governs over-the-counter derivative transactions, including the interest rate swaps and caps borrowers use to hedge floating-rate debt. It sets the legal relationship between the borrower and the derivative counterparty.
What documents make up an ISDA?
The ISDA Master Agreement is typically accompanied by a Schedule, which customizes the standard terms, and one or more Confirmations, which document individual trades. The counterparty is usually a bank. The agreement covers netting of payments, events of default, early termination triggers, and the methodology for calculating close-out amounts. Most institutional CRE borrowers who hedge floating-rate debt with an interest rate swap or cap have at least one ISDA in place.
Which ISDA provisions matter most to a CRE borrower?
The ISDA is one of the most consequential documents in a hedged borrower’s loan package, and often the least understood. The provisions that carry the most weight are the termination events (triggered by loan defaults, credit deterioration, or failure to post collateral), the collateral posting requirements (which may require the borrower to post cash if the swap’s mark-to-market moves against them), and the close-out methodology (which determines how much is owed on termination).
Many borrowers sign the ISDA without realizing that a cross-default provision links the swap to the loan: a loan default can trigger a swap termination, compounding the borrower’s exposure. The Schedule is where the customization happens and where negotiation effort belongs.
How ISDA provisions show up in LoanBoss
LoanBoss abstracts hedge requirements alongside the rest of the loan documents, so ISDA cross-default triggers, collateral thresholds, and termination events sit in the loan abstract with every other provision.
Frequently Asked Questions
Is “the ISDA” the association or the agreement?
The agreement. ISDA is the International Swaps and Derivatives Association, but in CRE practice “the ISDA” means the ISDA Master Agreement governing a borrower’s swaps and caps.
What is the ISDA Schedule?
The document that customizes the standard Master Agreement terms for a specific relationship. It is where the most important negotiation happens, including termination events and collateral posting requirements.
Can a loan default terminate my swap?
Yes, when the ISDA contains a cross-default provision linking the swap to the loan. A loan default then triggers early termination of the swap and a close-out payment, compounding the exposure.
Related Terms
- Interest Rate Swap
- Hedge Mark-to-Market
- Interest Rate Cap
- Covenant
- Hedge Requirements in Loan Documents: Replacement Caps, Swap Mark-to-Market and What Lenders Test
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.
Sources
- LoanBoss CRE Debt Glossary