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International Swaps and Derivatives Association (ISDA)

What is the International Swaps and Derivatives Association (ISDA)?

The International Swaps and Derivatives Association (ISDA) is a trade collective made up of more than 800 participants from almost 60 countries around the world. In 1992, the association developed a standardized contract called the ISDA Master Agreement for derivatives transactions. The group works to establish and oversee policies and legal statutes surrounding the trading of derivatives.

 

International Swaps and Derivatives Association (ISDA)

 

The ISDA’s participants include individuals and entities that work with over-the-counter (OTC) derivatives, namely dealers, service providers, and those who use derivatives at the end of the line. The group is also responsible for overseeing the standards and language used to talk about and sell derivatives – the financial products markup language (FpML).

 

Derivatives

The ISDA is concerned with derivatives, so, in order to gain a better understanding of exactly what the ISDA focuses on, it’s critical to understand derivatives.

Derivatives are contracts that get their value from an underlying index, interest rate, or asset. Derivatives are used for:

  • Opening up exposure to price fluctuations, so speculation is easier
  • Insurance against price movements
  • Providing lines of access to assets and markets that are more difficult to trade

 

There are a variety of derivatives available for use. They include:

  • Swaps
  • Futures
  • Forwards
  • Options
  • Variations on any of the above (i.e., collateralized debt obligations)

 

FpML

As mentioned above, the ISDA trademarked a language used to trade and sell derivatives, namely an electronic language known as the FpML. The application is an open source XML standard used to process OTC derivatives and is the standard for the language used throughout the derivatives industry when sharing information.

The FpML is trademarked by the ISDA; but because it is open source, it is free to all and can be contributed to by any professional or entity within the ISDA or the derivatives industry. Any changes or additions to the FpML must go through the FpML Standards Committee, which is also established by the ISDA.

The image below – taken from the ISDA’s website – provides a breakdown of the FpML:

 

FpML at a Glance

 

History and Accomplishments of the ISDA

Established in 1985, the ISDA is headquartered in New York. The organization was created to standardize the derivatives industry, putting in place the infrastructure necessary to effectively trade and sell derivatives, as well as to offer functional risk management processes that can be put into practice by any company or individual trading, selling, buying, or using derivatives.

Along with the creation of the FpML discussed above, the ISDA’s other notable addition to the derivatives industry occurred in 1992 when the organization developed the very first master agreement – as well as additional documentation – that standardized a contract that could be used for every derivative transaction. The contract was put in place to help mitigate risks associated with derivative transactions, including any potential legal risks.

The ISDA is an important entity, working to create a standard for those operating within the derivatives market. The organization – and all of its participants – work collectively to institute and uphold a set of standards that define and maintain a safe space for derivative traders and users to operate in.

 

Related Readings

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Guide to Commodity Trading
  • New York Mercantile Exchange (NYMEX)
  • Spot Price
  • Trading Mechanisms

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