The framework contract allows for the clearing of payments due in the same transaction, so that only one amount is exchanged between the parties instead of a large number of payments for the same transactions. Most counterparties also agree to agree on all amounts due in a single day, whether amounts are due in one or more transactions. The ISDA-Masteragrement determines whether the laws of the United Kingdom or the State of New York apply. In addition, the conditions for valuation, closing and clearing of all transactions recorded in the event of a termination event are defined. The framework contract is quite long and the negotiation process can be difficult, but once a framework contract is signed, the documentation of future transactions between parties will be reduced to a brief confirmation of the essential terms of the transaction. The framework agreement and timetable define the reasons why one party may impose the closure of covered transactions due to the appearance of a termination event by the other party. Standard termination events include defaults or bankruptcy. Other closing events that can be added to the calendar include a downgrade of credit data below a specified level. The most important thing is to remember that the ISDA executive contract is a clearing agreement and that all transactions are interdependent. Therefore, a default in a transaction counts by default among all transactions. Point 1 (c) describes the concept of a single agreement and is of paramount importance as it forms the basis for network closures. When a standard event occurs, all transactions are completed without exception.
The concept of out-of-gap clearing prevents a liquidator from making “cherry pickings,” i.e. making payments on profitable transactions for his bankrupt client and refusing to do so in the case of an unprofitable customer. In 1987, ISDA established three documents: (i) a standard form control agreement for U.S. dollar interest rate swaps; (ii) a standard-master contract for multi-currency interest rate and exchange rate swaps (known as the “1987 ISDA Executive Contract”); and (iii) definitions of interest rates and currencies. The framework contract also helps to reduce litigation by providing significant resources that define its contractual terms and explain the intent of the contract, thus preventing litigation from beginning and providing a neutral resource for interpreting standard contractual terms. Finally, the framework agreement provides significant assistance in managing risks and credit for the parties.