Over-the-counter derivatives are traded between two parties, not through an exchange or intermediary. The size of the over-the-counter market means that risk managers must carefully review traders and ensure that authorized transactions are properly managed. When two parties complete a transaction, they will each receive confirmation explaining their details and referring to the signed agreement. The terms of the ISDA master contract then cover the transaction. The ISDA Masteragrement, published by the International Swaps and Derivatives Association, is the most widely used master service contract for otC derivatives transactions internationally. It is part of a documentary framework that aims to provide comprehensive and flexible documentation on OVER-the-counter derivatives. The framework consists of a master contract, a calendar, confirmations, definition brochures and credit support documentation. Most multinational banks have ISDA master agreements. These agreements generally apply to all branches engaged in currency, interest rate or option trading. Banks require counterparties to sign an exchange agreement. Some also require exchange agreements. While the ISDA master contract is the norm, some of its terms and conditions are changed and defined in the accompanying schedule.

The schedule is negotiated, either to cover (a) the requirements of a given hedging transaction or (b) a current business relationship. Briggs J preferred the first of these two options. He considered that it would be “completely inconsistent with a reasonable understanding of the agreement” for the non-failing party to be exposed to the risk of having to make potentially significant payments in a transaction well past the date of the transaction. The mastery agreement is the central document around which the rest of the ISDA documentation structure is cultivated. The pre-printed framework contract is never amended, with the exception of the addition of the names of the parties, but is adapted to the master agreement by the use of the calendar, a document containing options, additions and changes to the framework contract. Over-the-counter derivatives are mainly used for security purposes. For example, a company can protect itself against unfavourable movements at medium- or long-term interest rates by taking out an interest rate swap to “block” a fixed interest rate for a period of time.