August 6, 2025
ISDA Master Agreement & Credit Support Annex – A Negotiation Guide for loan linked ISDA
This guide is designed to help navigate a typical 2002 ISDA Master Agreement & Credit Support Annex negotiation with your bank when hedging a loan with an interest rate swap. It is a general guide – some topics may apply to your situation whereas others may not. Where you are unsure, consider obtaining legal advice, as this guide is informational only and not legal advice. The main aim is to ensure the ISDA reflects that the hedge goes hand-in-hand with the loan, since otherwise they can behave differently in certain scenarios (as detailed below).
We will cover timelines, typical documentation that is required, negotiations tables and borrower-friendly asks.
A floating-rate project loan is usually hedged with one or more swaps. Nearly every bank now insists that those swaps sit under:
- the 2002 ISDA Master Agreement (the legal wrapper); and
- the Credit Support Annex ISDA (the collateral schedule that meets UK-EMIR, EU-EMIR and US Dodd-Frank daily margin rules).
Typical Timeline
| Week | What happens | Practical tip |
|---|---|---|
| 0 | Run auction for competing hedge terms. Mandate hedge bank(s), agree outline hedge strategy in the term sheet | Compete select banks with an RFP to get the best terms. Banks already in the lending syndicate will help cut KYC time |
| 1–2 | Exchange first drafts: ISDA, Schedule, CSA, Hedging Letter (if project CTA), security term sheet | Send your mark-ups together so issues are seen in context |
| 2–4 | KYC / onboarding, regulatory questionnaires (EMIR classification, reporting delegation, US ECP status) | Collect group structure chart and constitutional docs early – they slow deals more than the legal drafting |
| 3–6 | Negotiate legal terms (ISDA/Schedule/CSA and, if relevant, Inter-creditor/CTA hedge accession) | Keep lender counsel copied so loan and hedge triggers stay aligned |
| 5–7 | Agree collateral logistics: margin call emails, account control agreement for collateral account, valuation agents | Set valuation cut-off times that match project cash-flow sweep times |
| 6–8 | Finalise security and any guarantees; circulate execution versions of all documents | Confirm opinions: capacity, enforceability, and netting |
| 8 | Sign ISDA, CSA, Hedging Letter, Security Docs. Execute first Confirmation on the same day (often at loan signing) | Book the trade for the agreed hedge start date; ensure regulatory reporting is delegated to the bank |
| Ongoing | Daily margining under CSA, quarterly/annual confirmations of outstanding trades, compliance with portfolio reconciliation and dispute resolution procedures | Monitor MTM against threshold to avoid collateral surprises; reconcile with security agent statements |
Typical set of docs required for the hedge
| Document | Purpose | Who signs? | Key negotiation points |
|---|---|---|---|
| ISDA Master Agreement + Schedule | Sets the legal framework for all swaps | Borrower (or project company), hedge bank(s) | Default triggers, netting, close-out, governing law, cross-default, additional termination events, regulatory reps |
| Credit Support Annex (CSA) | Day-to-day collateral rules | Same parties. In project finance, the Security Agent is often the "Secured Party" | Threshold, MTA, eligible collateral, call times, interest on cash, substitution rights, rehypothecation |
| Confirmations (one per trade) | Trade-specific economics (notional, rate, dates) | Same parties | Early termination rights, break cost formula, fallback rate matching the loan |
| Hedging Letter / Hedge Accession Agreement (if a Common Terms Agreement (CTA) or Intercreditor Agreement governs the whole project financing) | Brings the swap into the financing "umbrella", confirms it is a permitted hedge and benefits from project security | Borrower, Hedge Bank, Security Agent, Facility Agent | Ranking of hedge claims, cure periods, application of security, voting rights in enforcement |
| Security Documents (if hedges share collateral with lenders) | Charges the project's cash flows and accounts in favour of the Security Agent for the swap exposure | Borrower, Security Agent | Scope of collateral, release mechanics after final maturity, turnover of hedge proceeds |
| Regulatory Side Letters / Protocol Adherences (e.g. EMIR Portfolio Reconciliation, UK BRRD bail-in, US QFC stay) | Fulfils local law or regulatory requirements | Borrower and Hedge Bank, sometimes group guarantor | Mostly boiler-plate, but check reporting delegation, dispute timelines, and governing law carved-outs |
Loan Linked ISDA - Negotiation Table
| Tag | Topic / Issue | ISDA Clause to Negotiate | Why it Matters | Borrower Ask & Sample Wording | Borrower Benefit & When to Use | Market Precedent / Likely Settle | Pro Tip |
|---|---|---|---|---|---|---|---|
| Commercial | Scope of Agreement / Single Agreement | Section 1(c) | Enables netting; all swaps fall under one "umbrella". | "All Transactions… form a single agreement." | Cuts credit exposure through netting and simplifies documentation. Use whenever you have multiple swaps now or expect to add more later, especially across group entities. | Standard, routinely accepted. | Include forward-starting swaps and avoid unintentionally pulling in group entities you don't want under the netting set-off. |
| Commercial | Payments & Deliveries | Section 2 | Keeps swap and loan cash flows aligned. | "Payments due on the same date… may be netted so only a single payment is made." | Avoids cash-flow mismatches and operational errors. Helpful where treasury wants straight-through processing and when swap and loan share the same interest periods. | Netting of coincident payments widely accepted. | Check day-count conventions and business-day calendars match the loan to remove hidden basis risk. |
| Regulatory | Benchmark Fallbacks | Schedule (2021 ISDA Definitions) | Ensures swap and loan move to the same fallback rate. | "Apply 2021 ISDA IRD Definitions… Adjustment Spread matches loan fallback." | Stops basis drift if LIBOR/CIBOR, etc., ceases. Essential for any IBOR-linked deal and in cross-border loans referencing different RFRs. | 2021 Definitions now universal. | Using the 2021 Definitions meets UK/EU Benchmarks Regulation and US rules; align spreads exactly with the loan. |
| Commercial | Close-out Methodology | Section 6(e); Schedule | Governs break-cost on early termination. | "Close-out Amount… mid-market quotations from at least three leading dealers." | Gives transparent pricing and curbs bank-driven valuations. Useful where early prepayment or refinancing is likely or markets are volatile. | Banks often remain Determining Party but accept objective "Close-out Amount". | Mirror the loan's break-cost wording so the hedge and loan unwind consistently. |
| Commercial | ATE / Defaults – Cross-Acceleration | Section 5; Schedule | Loan default could trigger swap termination. | "Cross-Acceleration applies; threshold and cure match the loan." | Prevents swap from blowing up on minor loan breaches. Valuable if covenants are tight or technical defaults are possible. | Cross-acceleration with matched thresholds usually agreed. | Never allow a lower trigger or shorter cure in the ISDA than in the credit agreement. |
| Regulatory | Credit Support Annex (CSA) | CSA ¶13; Schedule | Collateral terms drive liquidity needs. | "No IA; bilateral threshold £5–10 m; MTA £100 k; daily calls T+2." | Frees up cash and keeps collateral symmetrical. Best for IG corporates hedging genuine debt where regulatory VM must still be exchanged. | Two-way VM, zero IA and a sensible threshold common for IG corporates. | Regulatory margin rules (UK/EU EMIR, US CFTC) still require daily VM – size your threshold to cover normal MTM swings. |
| Regulatory | Valuation Agent & Dispute | CSA ¶5-6; Schedule | Who marks the swap and resolves MTM disputes. | "If PV01 diff ≥ 5 bp, appoint independent dealer within 2 days." | Secures fair valuations and avoids over-collateralising. Crucial for large or volatile swaps, or where borrower lacks in-house pricing. | Independent panel for material disputes widely accepted. | List acceptable brokers up front to meet EMIR dispute-resolution rules and prevent delay. |
| Commercial | Interest on Collateral – Zero Floor | CSA ¶10(e) | Stops negative interest on posted cash. | "Interest on Cash Collateral shall not be less than zero." | Protects against paying to post cash in negative-rate markets. Important for EUR, CHF, JPY collateral or any low-rate environment. | Zero floor since 2020. | Applies only to cash. For securities collateral, focus on haircuts instead. |
| Commercial | Set-off / Netting | Section 6(f); Schedule | Allows offsetting debts on default. | "Either party may set off any matured/unmatured obligation between parties and Affiliates." | Reduces settlement risk and net exposure. Helpful when several contracts exist with the same bank or affiliates. | Two-way set-off between contracting parties common; affiliates sometimes resisted. | Align the loan's set-off rights with the ISDA to avoid conflicting provisions. |
| Commercial | Tax Gross-Up | Section 2(d); Schedule | Keeps payments whole if withholding tax imposed. | "Gross-up applies only to post-trade taxes; dealer to seek relief." | Gives cost certainty by shifting new taxes to the payer. Relevant for cross-border swaps or jurisdictions prone to tax changes. | Post-trade only gross-up generally accepted. | Ensure loan and swap tax clauses match so one isn't more generous than the other. |
| Commercial | Governing Law / Jurisdiction | Section 13 | Easier enforcement when matched to the loan. | "English law / English courts" (or match loan). | Streamlines dispute resolution and ensures netting opinions line up. Use whenever loan and swap share the same law; avoids two separate forums. | Matching laws is standard. | Picking the loan's law also sidesteps extra bail-in or QFC wording that cross-border pairings can trigger. |
| Commercial | Force Majeure & Illegality | Section 5(b)(i)-(ii); Schedule | Stops swap terminating for mere operational issues. | "Party must use reasonable endeavours; waiting period 5 days." | Buys time to cure problems and keeps hedge alive. Useful in emerging markets, regulatory change, or where alternative offices exist. | Five- to eight-day waiting period common. | Require actual impossibility, not inconvenience; ask the bank to transfer the swap to another office first. |
| Commercial | Relationship with Loan Hedge Covenant | Bespoke clause in Schedule & loan | Loan may require a hedge. | "Hedge covenant waived if swap ends due to dealer default/ATE." | Avoids triggering a loan default for reasons outside borrower control. Essential whenever the financing agreement mandates a hedge. | Carve-out widely granted. | Secure the same carve-out in both the ISDA and the loan – belt and braces. |
| Commercial | Novation / Transfer Consent | Section 7; Schedule | Controls who your counterparty is and fees. | "Consent deemed if transferee credit ≥ bank; novation fee ≤ £5 k." | Maintains credit quality and caps costs if swap moves. Key when refinancing or group restructurings are on the cards. | Deemed consent with fee cap common for IG borrowers. | Fix a response deadline for consent and clarify any regulatory transfer requirements up front. |
Credit Support Annex ISDA – Key Terms to Negotiate
The Credit Support Annex (CSA) is the collateral schedule that bolts onto the ISDA Master Agreement. It sets the day-to-day rules for posting and returning margin (cash or securities) to cover mark-to-market movements on the swap. Since 2017, UK-EMIR, EU-EMIR and US Dodd-Frank rules have made daily variation margin mandatory for most uncleared interest-rate swaps, so a CSA is usually essential unless you and the bank both fall within a narrow exemption. A negotiated CSA:
- Meets regulatory duties (daily margin call mechanics, eligible collateral lists, dispute timelines).
- Reduces credit risk and pricing — collateral lowers the dealer’s capital charge, which can translate into tighter swap spreads.
- Gives the borrower liquidity certainty — by agreeing thresholds, MTA and eligible assets upfront you avoid surprise cash drains.
In practice you negotiate the CSA alongside the ISDA. The form itself is “standard” (1994/1995 Credit Support Annex or the 2016 VM-only CSA under either English or New York law) but the key economics sit in the Paragraph 13 elections, so it still needs careful tailoring.
| Tag | Topic / Issue | CSA Clause / Paragraph | Why it Matters | Borrower Ask & Sample Wording | Borrower Benefit & When to Use | Market Precedent / Likely Settle | Pro Tip |
|---|---|---|---|---|---|---|---|
| Regulatory | Form & Governing Law | Heading / Paragraph 13(g) | Determines which regulatory rules and netting opinions apply. | "1995 English-law CSA (multi-currency) to match loan; 2016 VM CSA if only VM needed." | Aligns collateral document with loan law and simplifies enforcement. Use English law for GBP/EUR loans, NY law for USD. | Banks accept borrower's law if ISDA is same. | Picking the loan's law avoids extra bail-in/QFC wording and keeps netting opinions clean. |
| Commercial | Scope of Covered Transactions | Paragraph 13(c) | Defines which swaps are margined. | "All Transactions under the Master Agreement except cleared trades." | Ensures every hedge linked to the loan benefits from the same threshold/MTA. Ideal when several swaps hedge the same facility. | Standard to cover all bilateral trades. | Exclude cleared swaps — CCP margins separately. |
| Regulatory | Margin Frequency & Timing | Paragraph 3 (Margin Calls) & 4 (Delivery) | Daily calls and prompt settlement are regulatory must-haves. | "Valuation Time: 1 p.m. London; Call by 2 p.m.; Transfer T+2." | Meets EMIR/CFTC daily VM rules yet gives treasury two days to move cash. | Daily VM with T+1 or T+2 transfer widely seen. | Agree local cutoff times that match your cash-management window. |
| Commercial | Threshold & Minimum Transfer Amount (MTA) | Paragraph 13(b) | Sets how much MTM can move before collateral shifts. | "Threshold: bilateral £5–10 m each; MTA: £100 k." | Less frequent margin moves, freeing working capital. Best for IG borrowers where exposure swings are modest. | Bilateral, symmetrical thresholds common for IG corporates. | Size threshold to worst-case MTM swing on the swap; too tight triggers daily cash drains. |
| Regulatory | Independent / Initial Margin | Paragraph 13(a) & 14 | Required only if parties breach regulatory IM thresholds. | "Independent Amount: None unless legally mandated." | Avoids tying up extra collateral where regulatory IM is not yet triggered (most corporate hedges stay below IM thresholds) | Dealers usually waive IA for corporate hedges; regulatory IM kicks in only if group AANA > €50 bn (EU/UK) or $8 bn swaps exposure (US). | Re-test exposure annually; if you approach threshold, plan for a separate IM CSA and custodian account. |
| Commercial | Eligible Collateral & Haircuts | Paragraph 13(f) & 14 | Dictates what assets you can post and valuation discounts. | "Eligible: Cash (GBP, USD, EUR) and Level-1 gov't bonds; standard ISDA haircuts." | Lets treasury use surplus cash or gilts instead of drawing on facilities. Valuable when cash pools exist. | Cash in swap currency plus high-grade gov't bonds standard; wider lists possible for IG names. | Check loan covenants allow holding/pledging these assets. |
| Commercial | Interest on Cash & Zero Floor | Paragraph 11 | Stops negative interest on posted cash. | "Interest rate shall not be less than zero." | Protects against paying to post cash in EUR/CHF/JPY. Key when rates dip below zero. | Zero floor now near-universal. | If you expect to receive collateral, confirm the same floor applies both ways. |
| Regulatory | Valuation Agent & Dispute | Paragraph 5 & 6 | Ensures fair MTM and quick dispute resolution. | "If PV01 diff ≥ 5 bp, refer to pre-agreed independent dealer within 2 days." | Prevents over-collateralisation; meets EMIR dispute-tracking rules. | Pre-named broker panel for material disputes common. | Put the named brokers in Paragraph 13 to avoid delay later. |
| Commercial | Substitution & Re-use | Paragraph 6(c) & 10(c) | Lets you swap collateral type or control bank rehypothecation. | "Borrower may substitute equivalent collateral on 1-day notice; Bank may not rehypothecate without consent." | Flexibility to manage treasury collateral and reduce rehypothecation risk. Helpful where bonds/cash mix changes over time. | One-day substitution right standard; banks often insist on rehypothecation for cash. | If rehypothecation allowed, seek acknowledgment that collateral remains borrower's property and is segregated in insolvency. |
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