Foreign Exchange Operations: Master Trading Agreements, Settlement, and Collateral

CHAPTER 5

Master Agreements

The Legal Underpinnings of the Foreign Exchange Market

Parties that engage in interbank foreign exchange trading need to formally set down the terms of their relationship, including their mutual understanding of their rights and obligations to each other. Early on this was accomplished through custom-made or bespoke trading contracts. In the 1980s, generic contract forms, known as master agreements, began to gain popularity. A form is a published template containing suggested wording for a legal document. The most important ones for foreign exchange are the IFXCO, FEOMA, and ISDA master agreements. There is a great economy in being able to use these forms, simply because they obviate the need to draft “homemade” trading agreements. Importantly, the aforementioned forms were drafted by experienced lawyers working in groups and committees. Over the ensuing decades, the Master Agreements have accumulated considerable legal history as they have been interpreted by courts in jurisdictions around the world.

Today, master agreements permeate not just foreign exchange, but the entire over-the-counter derivatives marketplace. The parties that enter into these agreements include foreign exchange dealing banks, corporations, financial institutions, investment companies, hedge funds, and some individual investors.

This chapter goes into a fair amount of detail about these important agreements. Some of the key elements are the single agreement concept, non-reliance, ...