A financial institution enters into several interest rate swaps with the same counterparty. How are a master agreement such as the ISDA Master Agreement and a trade confirmation used together?
Quiz: Documentation
Last reviewed: October 3, 2026
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5 questions to check your understanding of the chapter “Documentation”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.
Question 1
Answer and explanation
Answer: B
A master agreement fixes, once, the terms that are common to all the trades with the same counterparty from then on. For example, even if two interest rate swaps and one currency swap are entered into, a single master agreement places all three trades under the same terms. What is exchanged for each trade is a confirmation, which sets out the terms of that trade. In the OTC derivatives market around 2002, it was usual to sign a master agreement with each counterparty. Drawing up a new master agreement for each trade, or writing the terms of each trade into the master agreement and exchanging no confirmations, differs from this division of roles. Exchanging confirmations once per counterparty, rather than once per trade, also differs from it.
Learn more: The ISDA Master Agreement and Schedule
Question 2
Suppose a master agreement contains a netting provision. When an event of default or similar occurs for the counterparty, what is added up into a single amount in close-out netting?
Answer and explanation
Answer: D
In close-out netting, the values of the trades under the master agreement, both positive and negative, are added up into a single amount. Japan's Close-out Netting Act likewise defines close-out netting as adding up the values of all the trades under a master agreement into a single claim or obligation. Offsetting payments in the same currency on the same day into a single payment is payment netting, which is a separate mechanism within the netting provision from close-out netting. Adding up only the positive-value trades, or only the trades that have not been performed, does not match close-out netting, which adds up all the trades, positive and negative.
Learn more: The ISDA Master Agreement and Schedule
Question 3
As a hypothetical example, under a CSA, the threshold is 500 million yen for both parties, the minimum transfer amount is 100 million yen, and collateral is cash only with no haircut. The total market value of the trades, from the financial institution's point of view, is 800 million yen, and the institution holds no collateral at present. How much new collateral does the counterparty post?
Answer and explanation
Answer: C
The threshold is the limit up to which the counterparty is not asked to post collateral. Collateral covers only the part of the market value that exceeds the threshold. 800 million yen of market value less the counterparty's threshold of 500 million yen is 300 million yen. Since no collateral is held, the difference between the collateral required and the collateral held is also 300 million yen. This 300 million yen exceeds the minimum transfer amount of 100 million yen, so it is transferred. The full market value (800 million yen) includes the part within the threshold and does not deduct the threshold. The threshold amount (500 million yen) is the size of the range in which risk is taken without collateral, not the amount that is called. 200 million yen is 300 million yen less the minimum transfer amount of 100 million yen. The minimum transfer amount is a floor, so that a transfer is made only when it is exceeded, and it is not an amount to be deducted from the amount required.
Learn more: The Credit Support Annex (CSA)
Question 4
As a hypothetical example, the parties have calculated different amounts of variation margin, which is subject to Japan's margin requirements for uncleared derivatives. The financial institution asks the counterparty to post 1.2 billion yen, while the counterparty calculates 800 million yen in the same direction. If the CSA's dispute resolution provision sets a method that transfers the "undisputed amount", how much is transferred first?
Answer and explanation
Answer: A
A Japanese Cabinet Office order provides that, when the amounts of variation margin differ, the amount calculated by a method the parties agreed in advance is transferred. In the public comment procedure of December 2015, two methods were mentioned as market practice: using the average of the two parties' calculated amounts, and using the undisputed amount. The undisputed amount is the smaller of the two parties' calculated amounts. In this example, that is the smaller figure, 800 million yen. The figure of 1 billion yen is the amount under a contract that uses the average. The figure of 1.2 billion yen is the financial institution's calculated amount, which differs from the counterparty's. The figure of 400 million yen is the difference between 1.2 billion yen and 800 million yen, mistaking the amount of the difference for the amount to be transferred. Note that when the two parties' transfer directions differ, the undisputed amount is 0.
Learn more: The Credit Support Annex (CSA)
Question 5
As a hypothetical example, a company has ISDA Master Agreements with two counterparties: Bank A, which has adhered, and Company B, which has not. When this company adheres to the IBOR Fallbacks Protocol, one of the ISDA protocols, what happens to its agreement with Company B?
Answer and explanation
Answer: C
The IBOR Fallbacks Protocol amends the covered agreements between the parties that have adhered, all at once. If the counterparty has not adhered, the amendment does not reach the agreement with that counterparty. To reach the same terms with Company B, the two companies enter into a bilateral (individual) agreement to include fallback provisions. The unit of adherence is all the trades between the parties that have adhered, and adherence cannot be made trade by trade. Also, this protocol amends the existing agreements between the parties that have adhered. The fallback provisions that apply to new trades were prepared separately, as a supplement to the definitions. Note that adherence status can be checked in a list published by ISDA.
Learn more: ISDA Protocols